CALCULATION OF REGISTRATION FEE

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine. 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED  OCTOBER 6 , 2020

500 ,000 Shares

Presidio Property Trust, Inc.

Series A Common Stock

Presidio Property Trust, Inc. is a Maryland corporation that invests primarily in commercial properties, such as office, industrial and retail properties, as well as in residential model home properties, in regionally dominant markets across the United States.

We are offering 500 ,000 shares of our Series A Common Stock in this offering. We currently expect that the public offering price of our Series A Common Stock will be $5.00 per share.

Currently, our common stock is not traded on a national securities exchange and this will be our first listed public offering. We have been approved to list our Series A Common Stock on the Nasdaq Capital Market (“Nasdaq”) under the symbol “SQFT.”

We are an internally managed, diversified real estate investment trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended (the “Code”). Shares of our common stock are subject to limitations on ownership and transfer that are intended to assist us in qualifying as a REIT, among other purposes. Our charter generally prohibits any person or entity from actually, beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our capital stock. See the section entitled “Description of Capital Stock—Restrictions on Ownership and Transfer” included in this prospectus.  

Investing in our Series A Common Stock involves a high degree of risk. See “Risk Factors” beginning on page 14 of this prospectus to read about factors that you should consider before investing in our Series A Common Stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

We have granted the Underwriter an option to purchase up to 75 ,000 additional shares of our Series A Common Stock at the initial public offering price less the underwriting discount for 45 days after the date of this prospectus to cover over-allotments, if any.

The Underwriter expects to deliver the shares of Series A Common Stock to purchasers on or about                 , 2020 through the book-entry facilities of The Depository Trust Company.

The date of this prospectus is                 , 2020.

TABLE OF CONTENTS

We have not, and the Underwriter and its affiliates and agents have not, authorized any person to provide any information or represent anything about us other than what is contained in this prospectus. None of the information on our website referred to in this prospectus is incorporated by reference herein. We do not, and the Underwriter and its affiliates and agents do not, take any responsibility for, and can provide no assurance as to the reliability of, any information that others may provide to you. We are not, and the Underwriter and its affiliates and agents are not, making an offer to sell or soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. No action is being taken in any jurisdiction outside the United States to permit a public offering of the Series A Common Stock or possession or distribution of this prospectus in any such jurisdiction. Any person who comes into possession of this prospectus in jurisdictions outside the United States is required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus to that jurisdiction. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Series A Common Stock. Our business, financial condition, results of operations, cash flows and prospects may have changed since that date.

INDUSTRY AND MARKET DATA

We use market data and industry forecasts throughout this prospectus and, in particular, in the sections entitled “Market Overview” and “Business and Property.” Unless otherwise indicated, statements in this prospectus concerning our industry and the markets in which we operate, including our general expectations, competitive position, business opportunity and market size, growth and share, are based on information obtained from industry publications, government publications and third-party forecasts. The forecasts and projections are based upon industry surveys and the preparers’ experience in the industry. There can be no assurance that any of the projections will be achieved. We believe that the surveys and market research performed by others are reliable, but we have not independently verified this information. Accordingly, the accuracy and completeness of the information are not guaranteed.

RECAPITALIZATION

As of the date of this prospectus, there were 8,922,036 shares of our Series A Common Stock outstanding. Our Series A Common Stock is not currently traded on a national securities exchange. On July 29, 2020, we effectuated a one-for-two reverse stock split of our then outstanding shares of Series A Common Stock. A reverse stock split is a corporate action that decreases the number of outstanding shares of our company, which in turn increases the price per share of the securities. A reverse stock split does not impact the market capitalization of a company nor the value of a stockholder’s equity interests in our company. With a one-for-two reverse stock split, each stockholder holds half the number of shares as prior to the reverse split, but the value of each share immediately after the split is doubled: one share now equals the original value of two shares before the reverse split. Unless otherwise indicated, all information in this prospectus gives effect to, and all share and per share amounts have been retroactively adjusted to give effect to, the reverse stock split.

PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our Series A Common Stock. You should read carefully the more detailed information set forth in this prospectus, including the information under the heading “Risk Factors,” the historical financial statements, including the related notes, appearing elsewhere in this prospectus, and any free writing prospectus provided or approved by us prior to investing in our Series A Common Stock. Except where the context suggests otherwise, the terms “our company,” “we,” “us” and “our” refer to Presidio Property Trust, Inc., a Maryland corporation, together with its consolidated subsidiaries.

Unless otherwise indicated, the information contained in this prospectus assumes (i) that the Series A Common Stock to be sold in the offering is sold at $5.00 per share and (ii) that the Underwriter does not exercise its option to purchase up to an additional  75 ,000 shares solely to cover overallotments, if any.

Our Company

We are an internally managed, diversified real estate investment trust (“REIT”). Our current portfolio consists of approximately 1,129,738 square feet (which we refer to as “sf”) comprised of 10 office properties, one industrial property and four retail properties, which we refer to collectively as our commercial portfolio. Our commercial portfolio currently consists of properties located in Southern California, Colorado, and North Dakota, and we are currently considering new commercial property acquisitions in a variety of additional markets across the United States. Our commercial property tenant base is diversified, which helps limit our exposure to any single industry in which our tenants operate. As of June 30, 2020, our tenant base consists of 227 individual commercial tenants with an average remaining lease term of approximately 2.4 years. As of June 30, 2020, no commercial tenant represented more than approximately 6% of our annualized base rent, and our ten largest tenants represented approximately 29% of our annualized base rent.

In addition, we also own interests, through our subsidiaries and affiliated limited partnerships, in model homes primarily located in Texas and Florida. As of June 30, 2020, there were 132 such model homes. We purchase model homes from established residential home builders and lease them back to the same home builders on a triple-net basis.

Our main objective is to maximize long-term stockholder value through the acquisition, management, leasing and selective redevelopment of high-quality commercial properties. We focus on regionally dominant markets across the United States which we believe have attractive growth dynamics driven in part by important economic factors such as strong office-using employment growth; net in-migration of a highly educated workforce; a large student population; the stability provided by healthcare systems, government or other large institutional employer presence; low rates of unemployment; and lower cost of living versus gateway markets. We seek to maximize returns through investments in markets with limited supply, high barriers to entry, and stable and growing employment drivers. Our model home portfolio supports the objective of maximizing stockholder value by focusing on purchasing new single-family model homes and leasing them back to experienced homebuilders. We operate the model home portfolio in markets where we believe that there may be potential for price appreciation, and we can diversify by geography, builder size, and model home purchase price.

Our co-founder, Chairman, President and Chief Executive Officer is Jack K. Heilbron, a 40-year veteran in real estate investing, including eight years with Excel Realty Trust, Inc. (“Excel REIT”), previously an NYSE-listed retail REIT, and one of its predecessor companies, The Investors Realty Trust (“IRT”), prior to founding our company. Together with our former Chief Financial Officer and Treasurer, Kenneth W. Elsberry, Mr. Heilbron founded both our company and Clover Income and Growth REIT, Inc. (“Clover REIT”), a private REIT focused on retail mixed-use properties. During Mr. Heilbron’s tenure at Excel REIT, IRT and Clover REIT, Mr. Heilbron oversaw the investment of substantial real estate assets and saw Clover REIT liquidate at a substantial gain to investors. Our model home division is led by Larry G. Dubose, a pioneer in the industry who has over 30 years of experience acquiring, financing, managing, and operating model home sale-leaseback transactions with builders throughout the nation. Our senior management team also includes Gary M. Katz, Ann T. Nguyen, and Adam Sragovicz, each of whom has approximately 20 years or more of diverse experience in various aspects of real estate, including both commercial and residential, management, acquisitions, finance and dispositions in privately-held and publicly traded companies. We believe this industry experience and depth of relationships provides us with a significant advantage in sourcing, evaluating, underwriting and managing our investments.

Our Current Portfolio

Our commercial portfolio currently consists of 15 properties located in Southern California, Colorado, and North Dakota, and 132 model home properties located in seven states, with the majority located in Texas and Florida. This geographical clustering enables us to minimize operating costs and leverage efficiencies by managing a number of properties utilizing minimal overhead and staff.

Commercial Portfolio

As of June 30, 2020, our commercial real estate portfolio consisted of the following properties:

Model Home Portfolio

Our model home division utilizes newly-built single family model homes as an investment vehicle. Our model home division purchases model homes from, and leases them back to, homebuilders as commercial tenants on a triple-net basis. These triple-net investments in which the commercial homebuilders bear the expenses of maintenance, real estate taxes and insurance (in addition to defraying monthly mortgage payments), alleviate significant cost and risk normally associated with holding single family homes for speculative sale or for lease to residential tenants.

The following is a summary of our model home portfolio as of June 30, 2020:

Our Investment Approach

Our Commercial Property Investment Approach

We acquire high-quality commercial properties in overlooked and/or underserved markets, where we believe we can create long-term stockholder value. Our potential commercial investments are extensively reviewed based on several characteristics, including:

Our Model Home Property Investment Approach

Model homes are single-family homes constructed by builders for the purpose of showcasing floor plans, elevations, optional features, and workmanship when marketing the development where the homes are located. Each model home is designed to be held for a minimum lease term (usually three years), after which the model home is listed for sale at the estimated fair market value. We seek to purchase model homes that have a likelihood of appreciation within the expected three-year term of the lease. Our model home leaseback agreements are triple-net, requiring the homebuilder/tenant to pay all operating expenses. We seek model homes in a variety of locations, a variety of price ranges, and from a variety of builders and developers to diversify the risk from economic conditions that may adversely affect a particular development or location. During the six months ended June 30, 2020, we sold 21 model homes for approximately $8.0 million and recognized a gain of approximately $557,000. During the year ended December 31, 2019, we sold 41 model homes for approximately $14.6 million and recognized a gain of approximately $1.2 million.

Our Growth Strategy

Our principal business objective is to provide attractive risk-adjusted returns to our stockholders through a combination of (i) sustainable and increasing rental income and cash flow that generates reliable, increasing dividends and (ii) potential long-term appreciation in the value of our properties and common stock. Our primary strategy to achieve our business objective is to invest in, own and manage a diverse multi-tenant portfolio of high-quality commercial properties in promising regionally dominant markets, which we believe will drive higher tenant retention and occupancy.

Our Commercial Property Growth Strategy

We intend to grow our commercial portfolio by acquiring high-quality properties in our target markets. We may selectively invest in industrial, office, retail, triple net and other properties where we believe we can achieve higher risk-adjusted returns for our stockholders. We expect that our extensive broker and seller relationships will benefit our acquisition activities and help set us apart from competing buyers. In addition, we continue to actively manage our portfolio of commercial properties and continue to redeploy capital through the opportunistic sale of certain commercial properties.

We typically purchase properties at what we believe to be a discount to the replacement value of the property. We seek to enhance the value of these properties through active asset management where we believe we can increase occupancy and rent. We typically achieve this growth through value-added investments in these properties, such as common area renovations, enhancement of amenities, improved mechanical systems, and other value-enhancing investments. We generally will not invest in ground-up development as we believe our target markets’ rental rates are below those needed to justify new construction.

Our Model Home Growth Strategy

We intend to purchase model homes that are in the “move-up market” and in the first-time homebuyer market. The purchase of model homes will be from builders that have sufficient assets to fulfill their lease obligations and with model homes that offer a good opportunity for appreciation upon their sale. Sales proceeds from model homes will typically be reinvested to acquire new model homes.

Our Competitive Strengths

We believe that our management team’s extensive public REIT and general real estate experience distinguishes us from many other public and private real estate companies. Specifically, our competitive strengths include, among others:

Our Market Opportunity

Commercial Real Estate Overview

The U.S. economy had experienced consistent economic expansion and job growth since the 2008 recession, until the outbreak of the COVID-19 pandemic. Gross Domestic Product (“GDP”) increased at an annualized rate of 2.3% between 2010 and 2018 and increased at an annual rate of 2.1% in the fourth quarter of 2019 according to the Bureau of Economic Analysis. However, GDP decreased by 5.0% in the first quarter of 2020 and 31.7% in the second quarter of 2020 due to the COVID-19 pandemic and the strict stay-at-home orders and non-essential business closures that occurred across much of the country.

Despite the sharp and sudden contraction in GDP noted above, U.S. commercial property prices have still risen by 1.5% on a year-over-year basis as of July 2020 based on the U.S. National Commercial Property Price Index (CPPI) according to industry publication Real Capital Analytics. During this period, apartment and industrial properties have continued to experience price increases while office and retail assets have declined in value. Retail properties have declined by less than 5% over the last year.

The below chart shows the impact COVID-19 has had on transaction volumes across the major asset classes. Deal activity broadly declined beginning in April 2020 and remained subdued as of July 2020. 

Our Target Markets—Commercial Properties

We seek to invest in commercial properties in regionally dominant markets that we believe will outperform other markets due to attractive growth dynamics driven in part by economic factors such as strong office-using employment growth; net in-migration of a highly educated workforce; a large student population; the stability provided by healthcare systems, government or other large institutional employer presence; low rates of unemployment; and lower cost of living versus gateway markets. We seek regionally dominant markets that are typically not the primary focus of large institutional investors and other REITs. Our target markets feature the physical and intellectual infrastructure to attract and retain the human capital that drives a knowledge-based economy with less emphasis on production and greater focus on ideas and information. Our markets typically have strong public policy initiatives designed to enhance economic growth, such as low-cost centers for business, transportation infrastructure, walkable urban centers, significant cultural attractions, quality of life services, connectivity, and technology. We seek markets that also have key components of human capital development and retention, such as research universities, healthcare centers, financial services industries, software development, and media companies.

Within our target markets, we expect to primarily focus on acquiring office, industrial and retail properties with a purchase price between $10 million and $30 million in order to limit competition from both large and better capitalized buyers focused on core markets. We believe that it is challenging for many local buyers in our target markets to raise the debt and equity capital necessary to close real estate transactions in excess of $10 million.

The growth in jobs since the recession has not been spread evenly across the country. Secondary and tertiary metropolitan areas have stable and growing segments of the economy, such as technology, and are creating jobs at a faster rate than the nation as a whole. As companies continue to look for ways to reduce costs, more jobs are shifting to areas with lower living costs. Our target markets include areas meeting these criteria. 

We are currently considering commercial property acquisitions in the following target markets:

In addition to the above target markets, we will also consider acquisitions in other cities possessing similar economic drivers. 

Limited New Supply

The construction of new office buildings has been relatively low since the 2008 recession, especially considering the number of jobs created over that period. While a limited number of projects have been completed in our target markets, we believe there has been limited speculative office development over the last several years because current rental rates do not generally support new development. We believe the combination of job growth and limited new construction in our target markets is likely to decrease vacancy rates and increase rental rates in our target markets.

Lower Concentration of Institutional Competitors

We believe there is a relatively low level of participation by large institutional investors in our target markets because they have generally concentrated on gateway markets and major metropolitan areas. We believe that the relatively low level of participation by public REITs and other institutional investors in our target markets has caused acquisition prices to be lower and “cap” rates to be higher than in the gateway markets and other major metropolitan areas.

Model Home Overview

Our model home business continues to benefit from a strong residential home market. Existing single-family home sales were very strong in July 2020, up 24.7% from June 2020. Total sales volume is up 8.7% in July 2020 from a year ago. The national price increase in July 2020 reflects 101 straight months of year-over-year gains. Unsold inventory represents only a 3.1-month supply at the current sales rate. According to the National Association of Realtors, 96% of measured markets saw an increase in single-family home prices compared to last year.

Our Pipeline

Our pipeline of properties as of the date of this prospectus represents approximately $15 million of aggregate value, consisting of five commercial properties totaling 55,000 square feet.

The commercial properties are single-tenant medical buildings with strong credit on long-term leases located in the Midwest. We believe these properties present an attractive opportunity due to their stable, growing cash flow, 100% occupancy by credit tenants, and high potential for lease renewals.

We are in varying stages of discussion and review, and have completed only preliminary due diligence, with respect to the general office properties in our investment pipeline. We cannot provide any assurance that we will be successful in completing the acquisition of any of these properties.

Consistent with our investment strategy, our pipeline is sourced primarily off-market, prior to being marketed, or actively on the market, often by owners or brokers with whom we have successfully transacted in the past. We believe our successful track record of acquiring properties in several markets has developed a positive reputation for our company and provides us with attractive investment opportunities.

Summary Risk Factors

An investment in shares of our Series A Common Stock involves a high degree of risk. You should carefully consider the matters discussed below and in the “Risk Factors” section beginning on page 14 of this prospectus prior to deciding whether to invest in our Series A Common Stock. If any of the following risks occur, our business, financial condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects could be materially and adversely affected. In that case, the market price of our Series A Common Stock could decline and you may lose some or all of your investment. Some of these risks include:

Our REIT Status

We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2000. To continue to be taxed as a REIT, we must satisfy numerous organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders, as defined in the Code and calculated on an annual basis. As a REIT, we are generally not subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even though we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income. For more information, please see “U.S. Federal Income Tax Considerations.”

Distribution Policy

We plan to distribute at least 90% of our annual REIT taxable income to our stockholders in order to maintain our status as a REIT.

We intend to declare quarterly distributions. To be able to pay such dividends, our goal is to generate cash distributions from operating cash flow and proceeds from the sale of properties. During 2019 and 2018, we declared distributions of approximately $1.1 million each year. However, we cannot provide any assurance as to the amount or timing of future distributions. For example, our distributions were suspended for the periods from the third quarter of 2017 through the third quarter of 2018 and from the second quarter of 2019 through the second quarter of 2020.

To the extent that we make distributions in excess of our earnings and profits, as computed for federal income tax purposes, these distributions will represent a return of capital, rather than a dividend, for federal income tax purposes. Distributions that are treated as a return of capital for federal income tax purposes generally will not be taxable as a dividend to a U.S. stockholder, but will reduce the stockholder’s basis in its shares (but not below zero) and therefore can result in the stockholder having a higher gain upon a subsequent sale of such shares. Return of capital distributions in excess of a stockholder’s basis generally will be treated as gain from the sale of such shares for federal income tax purposes.

We provide each of our stockholders a statement detailing distributions paid during the preceding year and their characterization as ordinary income, capital gain or return of capital. For the years ended December 31, 2019 and 2018, distributions were reported as a distribution of taxable earnings and a return of capital to the stockholders.

Organizational Structure

The following chart summarizes our current ownership structure:

Corporate Information

We were incorporated in the State of California on September 28, 1999 under the name NetREIT, and in June 2010, we reincorporated as a Maryland corporation. In October 2017, we changed our name to “Presidio Property Trust, Inc.” Our executive offices are located at 4995 Murphy Canyon Road, Suite 300, San Diego, California 92123. Our telephone number is (760) 471-8536. We maintain an internet website at www.presidiopt.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus or the registration statement of which it forms a part.

The Offering

Summary Historical Financial Data

The following financial data should be read in conjunction with the audited and unaudited financial statements and the related notes included elsewhere in this prospectus.

The following table sets forth summary financial and operating data for our company for the prior two fiscal years and for each of the six-month periods ended June 30, 2020 and 2019. The historical balance sheet information as of December 31, 2019 and 2018 and the combined statements of operations information for the years ended December 31, 2019 and 2018 have been derived from the historical audited combined financial statements included elsewhere in this prospectus. The unaudited historical balance sheet data information as of June 30, 2020 and the combined statements of operations for each of the six months ended June 30, 2020 and 2019 have been derived from the unaudited historical financial statements included elsewhere in this prospectus.

The information presented below should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions” and our audited and unaudited financial statements and related notes, which are included elsewhere in this prospectus.

Presidio Property Trust, Inc. Historical Financial Data

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. Any of the following circumstances could have a material adverse impact on our business, financial condition, liquidity, results of operations, cash available for distribution, ability to service our debt obligations and/or business prospects, which could cause you to lose some or all of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business, Properties and Operations

Our business, financial condition, results of operations and cash flows are expected to be adversely affected by the recent COVID-19 pandemic and the impact could be material to us.

The current outbreak of the novel coronavirus (COVID-19), and the resulting volatility it has created, has disrupted our business and we expect that the COVID-19 pandemic, may significantly adversely impact our business, financial condition and results of operations going forward. Other potential pandemics or outbreaks could materially adversely affect our business, financial condition, results of operations and cash flows in the future. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an unknown magnitude and duration.

Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States (including the states and cities that comprise the San Diego, California; Denver and Colorado Springs, Colorado; Fargo and Bismarck, North Dakota; and other metro regions, where we own and operate properties) have also instituted quarantines, “shelter in place” mandates, including rules and restrictions on travel and the types of businesses that may continue to operate. As a result, the COVID-19 pandemic is negatively impacting almost every industry, both inside and outside these metro regions, directly or indirectly and has created business continuity issues. For instance, a number of our commercial tenants have announced temporary closures of their offices or stores and requested temporary rent deferral or rent abatement during this pandemic. In addition, jurisdictions where we own and operate properties have implemented, or may implement, rent freezes, eviction freezes, or other similar restrictions. The full extent of the impacts on our business over the long term are largely uncertain and dependent on a number of factors beyond our control.

As a result of the effects of the COVID-19 pandemic, we have been and may continue to be impacted by one or more of the following:

The significance, extent and duration of the impact of COVID-19 remains largely uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19, the extent and effectiveness of the containment measures taken, and the response of the overall economy, the financial markets and the population, once the current containment measures are lifted.

The rapid development and volatility of this situation precludes us from making any prediction as to the ultimate adverse impact of COVID-19. As a result, we cannot provide an estimate of the overall impact of the COVID-19 pandemic on our business or when, or if, we (or our tenants) will be able to resume fully normal operations. Nevertheless, COVID-19 presents material uncertainty and risk with respect to our business, financial performance and condition, operating results and cash flows.

The impact of COVID-19 may also exacerbate other risks discussed in this prospectus, any of which could have a material effect on us.

We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs.

As a real estate company, we are subject to various changes in real estate conditions, and any negative trends in such real estate conditions may adversely affect our results of operations through decreased revenues or increased costs. These conditions include:

Moreover, other factors may adversely affect our results of operations, including potential liability under environmental and other laws and other unforeseen events, many of which are discussed elsewhere in the following risk factors. Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.

Conditions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on our operations.

The financial markets could tighten with respect to secured real estate financing. Lenders with whom we typically deal may increase their credit spreads resulting in an increase in borrowing costs. Higher costs of mortgage financing may result in lower yields from our real estate investments, which may reduce our cash flow available for distribution to our stockholders. Reduced cash flow could also diminish our ability to purchase additional properties and thus decrease our diversification of real estate ownership.

Disruptions in the financial markets and uncertain economic conditions could adversely affect the value of our real estate investments.

Disruptions in the financial markets could adversely affect the value of our real estate investments. Such conditions could impact commercial real estate fundamentals and result in lower occupancy, lower rental rates, and declining values in our real estate portfolio and in the collateral securing our loan investments. As a result, the value of our property investments could decrease below the amounts paid for such investments, the value of collateral securing our loans could decrease below the outstanding principal amounts of such loans, and revenues from our properties could decrease due to fewer and/or delinquent tenants or lower rental rates. These factors would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

A decrease in real estate values could negatively affect our ability to refinance our existing mortgage obligations or obtain larger mortgages.

A decrease in real estate values would decrease the principal amount of secured loans we can obtain on a specific property and our ability to refinance our existing mortgage loans. In some circumstances, a decrease in the value of an existing property which secures a mortgage loan may require us to prepay or post additional security for that mortgage loan. This would occur where the lender’s initial appraised value of the property decreases below the value required to maintain a loan-to-value ratio specified in the mortgage loan agreement. Thus, any sustained period of depressed real estate prices would likely adversely affect our ability to finance our real estate investments.

We may be adversely affected by unfavorable economic changes in the geographic areas where our properties are located.

Adverse economic conditions in areas where properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our real estate portfolio. The deterioration of any of these local conditions could hinder our ability to profitably operate a property and adversely affect the price and terms of a sale or other disposition of the property.

Competition for properties to acquire may limit the opportunities available to us and increase our acquisition costs, which could have a material adverse effect on our growth prospects and negatively impact our profitability.

The market for property to acquire continues to be competitive, which may reduce suitable investment opportunities available to us and increase acquisition purchase prices. Competition for properties offering higher rates of returns may intensify if real estate investments become more attractive relative to other investments. In acquiring real properties, we may experience considerable competition from a field of other investors, including other REITs, private equity investors, institutional investment funds, and real estate investment programs. Many of these competitors are larger than we are and have access to greater financial resources and better access to lower costs of capital. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments. This competition may limit our ability to take advantage of attractive investment opportunities that are consistent with our objectives. Our inability to acquire desirable properties on favorable terms could adversely affect our growth prospects, financial condition, our profitability and our ability to pay dividends.

Our inability to sell a property at the time and on the terms we desire could limit our ability to realize a gain on our investments and pay distributions to our stockholders.

Generally, we seek to sell, exchange or otherwise dispose of our properties when we determine such action to be in our best interests. Many factors beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates, supply and demand, and tax considerations. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Therefore, our inability to sell properties at the time and on the terms we want could reduce our cash flow, affect our ability to service or reduce our debt obligations, and limit our ability to make distributions to our stockholders.

Lease default or termination by one of our major tenants could adversely impact our operations and our ability to pay dividends.

The success of our real estate investments depend on the financial stability of our tenants. A default or termination by a significant tenant (or a series of tenants) on its lease payments could cause us to lose the revenue associated with such lease and seek an alternative source of revenue to meet mortgage payments and prevent a foreclosure, if the property is subject to a mortgage. In the event of a significant tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment. Additionally, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. These events could cause us to reduce the amount of distributions to our stockholders.

A property that becomes vacant could be difficult to sell or re-lease and could have a material adverse effect on our operations.

We expect portions of our properties to periodically become vacant by reason of lease expirations, terminations, or tenant defaults. If a tenant vacates a property, we may be unable to re-lease the property without incurring additional expenditures, or at all. If the vacancy continues for a long period of time, if the rental rates upon such re-lease are significantly lower than expected, or if our reserves for these purposes prove inadequate, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders. In addition, because a property’s market value depends principally upon the value of the leases associated with that property, the resale value of a property with high or prolonged vacancies could suffer, which could further reduce our returns.

We may incur substantial costs in improving our properties.

In order to re-lease or sell a property, substantial renovations or remodeling could be required. For instance, we expect that some of our properties will be designed for use by a particular tenant or business. Upon default or termination of the lease by such a tenant, the property might not be marketable without substantial capital improvements. The cost of construction in connection with any renovations and the time it takes to complete such renovations may be affected by factors beyond our control, including material and labor shortages, general contractor and/or subcontractor defaults and delays, permitting issues, weather conditions, and changes in federal, state and local laws. If we experience cost overruns resulting from delays or other causes in any construction project, we may have to seek additional debt financing. Further, delays in construction will cause a delay in our receipt of revenues from that property and could adversely affect our ability to meet our debt service obligations.

Uninsured and/or underinsured losses may adversely affect returns to our stockholders.

Our policy is to obtain insurance coverage for each of our properties covering loss from liability, fire, and casualty in the amounts and under the terms we deem sufficient to insure our losses. Under tenant leases on our commercial properties, we require our tenants to obtain insurance to cover casualty losses and general liability in amounts and under terms customarily obtained for similar properties in the area. However, in certain areas, insurance to cover some losses, generally losses of a catastrophic nature such as earthquakes, floods, wind, hail, terrorism and wars, is either unavailable or cannot be obtained at a reasonable cost. Consequently, we may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, we could lose some or all of our investment in the property. In addition, other than any working capital reserve or other reserves we may establish, we likely would have no source of funding to repair or reconstruct any uninsured or underinsured property.

Since we are not required to maintain specific levels of cash reserves, we may have difficulty in the event of increased or unanticipated expenses.

We do not currently have, nor do we anticipate that we will establish in the future, a permanent reserve for maintenance and repairs, lease commissions, or tenant improvements of real estate properties. To the extent that existing expenses increase or unanticipated expenses arise and accumulated reserves are insufficient to meet such expenses, we would be required to obtain additional funds through borrowing or the sale of property. There can be no guarantee that such additional funds will be available on favorable terms, or at all.

We may have to extend credit to buyers of our properties and a default by such buyers could have a material adverse effect on our operations and our ability to pay dividends.

In order to sell a property, we may lend the buyer all or a portion of the purchase price. When we provide financing to a buyer, we bear the risk that the buyer may default or that we may not receive full payment for the property sold. Even in the absence of a buyer default, the distribution of the proceeds of the sale to our stockholders, or the reinvestment of the proceeds in other property, will be delayed until the promissory note or collateral we may accept upon a sale is actually paid, sold, refinanced or otherwise disposed.

We may acquire properties in joint ventures, partnerships or through limited liability companies, which could limit our ability to control or liquidate such holdings.

We may hold properties indirectly with others as co-owners (a co-tenancy interest) or indirectly through an intermediary entity such as a joint venture, partnership or limited liability company. Also, we may on occasion purchase an interest in a long-term leasehold estate or we may enter into a sale-leaseback financing transaction (see risk factor titled “In a sale-leaseback transaction, we are at risk that our seller/lessee will default, which could impair our operations and limit our ability to pay dividends.”). Such ownership structures allow us to hold a more valuable property with a smaller investment, but may reduce our ability to control such properties. In addition, if our co-owner in such arrangements experiences financial difficulties or is otherwise unable or unwilling to fulfill its obligations, we may be forced to find a new co-owner on less favorable terms or lose our interest in such property if no co-owner can be found.

As a general partner or member in DownREIT entities, we could be responsible for all liabilities of such entities.

We own three of our properties indirectly through limited liability companies and limited partnerships under a DownREIT structure. In a DownREIT structure, as well as some joint ventures or other investments we may make, we may utilize a limited liability company or a limited partnership as the holder of our real estate investment. We currently own a portion of these interests as a member, general partner and/or limited partner and in the future may acquire all or a greater interest in such entity. As a sole member or general partner, we are or would be potentially liable for all of the liabilities of the entities, even if we do not have rights of management or control over its operations. Therefore, our liability could far exceed the amount or value of investment we initially made, or then had, in such entities.

Our ability to operate a property may be limited by contract, which could prevent us from obtaining the maximum value from such properties.

Some of our properties will likely be contiguous to other parcels of real property, for example, comprising part of the same shopping center development. In some cases, there could exist significant covenants, conditions and restrictions, known as CC&Rs, relating to such property and any improvements or easements related to that property. The CC&Rs would restrict our operation of that property and could adversely affect the value of such property, either of which could adversely affect our operating costs and reduce the amount of funds that we have available to pay dividends.

We may acquire properties “as is,” which increases the risk that we will have to remedy defects or costs without recourse to the seller.

We may acquire real estate properties “as is,” with only limited representations and warranties from the seller regarding matters affecting the condition, use and ownership of the property. If defects in the property or other matters adversely affecting the property are discovered post-closing, we may not be able to pursue a claim for any or all damages against the seller. Therefore, we could lose some or all of our invested capital in the property as well as rental income. Such a situation could negatively affect our financial condition and results of operations.

In a sale-leaseback transaction, we are at risk that our seller/lessee will default, which could impair our operations and limit our ability to pay dividends.

In our model homes business we frequently lease model home properties back to the seller or homebuilder for a certain period of time. Our ability to meet any mortgage payments is subject to the seller/lessee’s ability to pay its rent and other lease obligations, such as triple net expenses, on a timely basis. A default by the seller/lessee or other premature termination of its leaseback agreement with us and our subsequent inability to release the property could cause us to suffer losses and adversely affect our financial condition and ability to pay dividends.

Our model home business is substantially dependent on the supply and/or demand for single family homes.

Any significant decrease in the supply and/or demand for single family homes could have an adverse effect on our business. Reductions in the number of model home properties built by homebuilders due to fewer planned unit developments, rising construction costs or other factors affecting supply could reduce the number of acquisition opportunities available to us. The level of demand for single family homes may be impacted by a variety of factors including changes in population density, the health of local, regional and national economies, mortgage rates, and the demand and use of model homes in newly developed communities by homebuilders and developers.

We may be unable to acquire and/or manage additional model homes at competitive prices or at all.

Model homes generally have a short life before becoming residential homes and there are a limited number of model homes at any given time. In addition, as each model home is unique, we need to expend resources to complete our due diligence and underwriting process on many individual model homes, thereby increasing our acquisition costs and possibly reducing the amount that we are able to pay for a particular property. Accordingly, our plan to grow our model home business by acquiring additional model homes to lease back to home builders may not succeed.

There are a limited number of model homes and competition to buy these properties may be significant.

We plan to acquire model homes to lease back to home builders when we identify attractive opportunities and have financing available to complete such acquisitions. We may face competition for acquisition opportunities from other investors. We may be unable to acquire a desired property because of competition from other well capitalized real estate investors, including private investment funds and others. Competition from other real estate investors may also significantly increase the purchase price we must pay to acquire properties. In addition, our initial public offering may generate additional competition from other REITs, real estate companies and other investors with more resources than we have that did not previously focus on model homes as an investment opportunity.

A significant percentage of our properties are concentrated in a small number of states, which exposes our business to the effects of certain regional events and occurrences.

Our commercial properties are currently located in Southern California, Colorado and North Dakota. Our model home portfolio consists of properties currently located in seven states, although a significant concentration of our model homes are located in two states. As of June 30, 2020, approximately 91% of our model homes were located in Texas and Florida with approximately 77% located in Texas. This concentration of properties in a limited number of markets may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. In addition, our properties are subject to the effects of adverse acts of nature, such as winter storms, hurricanes, hail storms, strong winds, earthquakes and tornadoes, which may cause damage, such as flooding, to our properties. Additionally, we cannot assure you that the amount of casualty insurance we maintain would entirely cover damages caused by any such event, or in the case of our model homes portfolio or commercial triple net leases, that the insurance maintained by our tenants would entirely cover damages caused by any such event.

Our geographic concentration of properties poses a greater risk of negatively impacting our revenues if these areas are more severely impacted by adverse economic conditions and extreme weather than other areas in the United States.

We may be required under applicable accounting principles and standards to make impairment charges against one or more of our properties.

Under current accounting standards, requirements, and principles, we are required to periodically evaluate our real estate investments for impairment based on a number of indicators. Impairment indicators include real estate markets, leasing rates, occupancy levels, mortgage loan status, and other factors which affect the value of a particular property. For example, a tenant’s default under a lease, the upcoming termination of a long-term lease, the pending maturity of a mortgage loan secured by a property, and the unavailability of replacement financing are all impairment indicators. The presence of any of these indicators may require us to make a material impairment charge against the property so affected. If we determine an impairment has occurred, we are required to make an adjustment to the net carrying value of the property which could have a material adverse effect on our results of operations and financial condition for the period in which the impairment charge is recorded.

Discovery of toxic mold on our properties may adversely affect our results of operation.

Litigation and concern about indoor exposure to certain types of toxic molds have been increasing as the public becomes more aware that exposure to mold can cause a variety of health effects and symptoms, including allergic reactions. Toxic molds can be found almost anywhere; when excessive moisture accumulates in buildings or on building materials, mold growth will often occur, particularly if the moisture remains undiscovered or unaddressed. We attempt to acquire properties where there is no toxic mold or where there has not been any proceeding or litigation with respect to the presence of toxic mold. However, we cannot provide assurances that toxic mold will not exist on any of our properties or will not subsequently develop. The presence of toxic mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of toxic mold could expose us to liability from our tenants, employees of our tenants, and others if property damage or health concerns arise.

Our long-term growth may depend on obtaining additional equity capital.

Historically, we relied on cash from the sale of our equity securities to fund the implementation of our business plan, including property acquisitions and building our staff and internal management and administrative capabilities. We terminated our Series A Common Stock private placement on December 31, 2011 and closed on a preferred stock financing in August 2014, which financing was repaid in September 2019. Our continued ability to fund real estate investments, our operations, and payment of dividends to our stockholders will likely be dependent upon our obtaining additional capital through the additional sales of our equity and/or debt securities. Without additional capital, we may not be able to grow our asset base to a size that is sufficient to support our planned growth, current operations, or to pay dividends to our stockholders at rates or at the levels required to maintain our REIT status (see risk factor titled “We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution or other requirements or for working capital purposes.”). There is no assurance as to when and under what terms we could successfully obtain additional funding through the sale of our equity and/or debt securities. Our access to additional equity or debt capital depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our expected future earnings, and our debt levels.

We currently are dependent on internal cash from our operations, financing and proceeds from property sales to fund future property acquisitions, meet our operational costs and pay dividends to our stockholders.

To the extent the cash we receive from our real estate investments and re-financing of existing properties is not sufficient to pay our costs of operations, our acquisition of additional properties, or our payment of dividends to our stockholders, we would be required to seek capital through additional measures. We may incur additional debt or issue additional preferred and common stock for various purposes, including, without limitation, to fund future acquisitions and operational needs. Other measures of generating or preserving capital could include decreasing our operational costs through reductions in personnel or facilities, reducing or suspending our acquisition of real estate, and reducing or suspending dividends to our stockholders.

Reducing or suspending our property acquisition program would prevent us from fully implementing our business plan and reaching our investment objectives. Reducing or suspending the payment of dividends to our stockholders would decrease our stockholders’ return on their investment and possibly prevent us from satisfying the minimum distribution or other requirements of the REIT provisions (see risk factor titled “We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.”). Any of these measures would likely have a substantial adverse effect on our financial condition, the value of our common stock, and our ability to raise additional capital.

There can be no assurance that distributions will be paid, maintained or increased over time.

There are many factors that can affect the availability and timing of cash distributions to our stockholders. Distributions are expected to be based upon our FFO, MFFO, financial condition, cash flows and liquidity, debt service requirements and capital or other expenditure requirements for our properties, and any distributions will be authorized at the sole discretion of our board of directors, and their form, timing and amount, if any, will be affected by many factors, such as our ability to acquire profitable real estate investments and successfully manage our real estate properties and our operating expenses. Other factors may be beyond our control. We can therefore provide no assurance that we will be able to pay or maintain distributions or that distributions will increase over time. For example, our distributions were suspended for the periods from the third quarter of 2017 through the third quarter of 2018 and for the final three quarters of 2019 through the date of this prospectus. If we do not have sufficient cash available for distributions, we may need to fund the shortage out of working capital or borrow to provide funds for such distributions, which would reduce the amount of proceeds available for real estate investments and increase our future interest costs. Our inability to pay distributions, or to pay distributions at expected levels, could result in a decrease in the per share trading price of our Series A Common Stock.

If we are unable to find suitable investments, we may not be able to achieve our investment objectives or continue to pay distributions.

Our ability to achieve our investment objectives and to pay distributions on a regular basis is dependent upon our acquisition of suitable property investments and obtaining satisfactory financing arrangements. We cannot be sure that our management will be successful in finding suitable properties on financially attractive terms. If our management is unable to find such investments, we will hold the proceeds available for investment in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. Holding such short-term investments will prevent us from making the long-term investments necessary to generate operating income to pay distributions. As a result, we will need to raise additional capital to continue to pay distributions until such time as suitable property investments become available (see risk factor titled “We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution or other requirements or for working capital purposes.”). In the event that we are unable to do so, our ability to pay distributions to our stockholders will be adversely affected.

We depend on key personnel, and the loss of such persons could impair our ability to achieve our business objectives.

Our success substantially depends upon the continued contributions of certain key personnel in evaluating and securing investments, selecting tenants and arranging financing. Our key personnel include Jack K. Heilbron and Larry G. Dubose, each of whom would be difficult to replace. If either of these individuals or any of the other members of our management team were to leave, the implementation of our investment strategies could be delayed or hindered, and our operating results could suffer.

We also believe that our future success depends, in large part, upon our ability to hire and retain skilled and experienced managerial and operational personnel. Competition for skilled and experienced professionals has intensified as current unemployment levels are at or near historic lows, and we cannot assure our stockholders that we will be successful in attracting and retaining such personnel.

We rely on third-party property managers to manage our properties and brokers or agents to lease our properties.

We rely on various third-party property managers to manage most of our properties and local brokers or agents to lease vacant space. These third-party property managers have significant decision-making authority with respect to the management of our properties. Although we are significantly engaged with our third-party property managers, our ability to direct and control how our properties are managed on a day-to-day basis may be limited. Major issues encountered by our property managers, broker or leasing agents could adversely impact the operation and profitability of our properties and, consequently, our financial condition, results of operations, cash flows, cash available for distributions and our ability to service our debt obligations.

We may change our investment and business policies without stockholder consent, and such changes could increase our exposure to operational risks.

Our Board of Directors may change our investment and business policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders. Although our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our company and stockholders, a change in such policies could result in our making investments different from, and possibly riskier than, investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

If we failed to comply with applicable exemption requirements in connection with our private placement offerings, we may be liable for damages to certain of our stockholders.

Prior to 2011 and in more recent years, we or one of our affiliated entities conducted private placement offerings in reliance upon the private placement exemptions from registration under Section 4(a)(2) and Rule 506 of Regulation D under the Securities Act of 1933, as amended (“Securities Act”), and various exemptions from registration under applicable state securities laws. Many requirements and conditions of these exemptions are subject to factual circumstances and subjective interpretation. There is no assurance that the Securities and Exchange Commission (“SEC”), any state securities law administrator, or a trier of fact in a court or arbitration proceeding would not determine that we failed to meet one or more of these requirements. In the event that we are found to have sold our securities without an applicable exemption from registration, we could be liable to the purchasers of our securities in that offering for rescission and possibly monetary damages. If a number of investors were successful in seeking one or more of these remedies, we could face severe financial demands that would adversely affect our business and financial condition.

Further, under applicable laws and regulations, our multiple offerings could be combined (or integrated) and treated as a single offering for federal and state securities law purposes. While we have structured each of our offerings individually so that if they are combined they would meet exemption requirements, the law related to integrated offerings remains somewhat unclear and has not been fully defined by the SEC or the courts. Thus, there is uncertainty as to our burden of proving that we have correctly relied on one or more of these private placement exemptions.

If we are deemed to be an investment company under the Investment Company Act, our stockholders’ investment return may be reduced.

We are not registered as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”), based on exceptions we believe are available to us. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things, limitations on capital structure, restrictions on specified investments, prohibitions on transactions with affiliates, and compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our Board of Directors or stockholders to approve proposals to acquire our company or effect a change in control.

Certain provisions of the Maryland General Corporation Law (“MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of their shares of common stock, including:

By resolution, our Board of Directors has exempted business combinations between us and any other person, provided that the business combination is first approved by our Board of Directors (including a majority of our directors who are not affiliates or associates of such person). We cannot assure you that our Board of Directors will not amend or repeal this resolution in the future. In addition, pursuant to a provision in our bylaws we have opted out of the control share provisions of the MGCL.

In addition, the “unsolicited takeover” provisions of Title 3, Subtitle 8 of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director. Such takeover defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-current market price.

Our Board of Directors may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.

Our charter permits our Board of Directors, without any action by our stockholders, to authorize the issuance of stock in one or more classes or series. Our Board of Directors may also classify or reclassify any unissued preferred stock and set or change the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of any such stock, which rights may be superior to those of our common stock. Thus, our Board of Directors could authorize the issuance of shares of a class or series of stock with terms and conditions which could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our outstanding common stock might receive a premium for their shares over the then current market price of our common stock.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Our charter eliminates the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law and our charter, our directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from:

Our charter authorizes us and our bylaws obligate us to indemnify each of our directors or officers who is or is threatened to be made a party to, or witness in, a proceeding by reason of his or her service in those or certain other capacities, to the maximum extent permitted by Maryland law, from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her status as a present or former director or officer of us or serving in such other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our stockholders may have more limited rights to recover money damages from our directors and officers than might otherwise exist absent these provisions in our charter and bylaws or that might exist with other companies, which could limit your recourse in the event of actions that are not in our or your best interests.

Our management faces certain conflicts of interest with respect to their other positions and/or interests outside of our company, which could hinder our ability to implement our business strategy and to generate returns to our stockholders.

We rely on our management, including Mr. Heilbron, for implementation of our investment policies and our day-to-day operations. Although the majority of his business time is spent working for our company, Mr. Heilbron engages in other investment and business activities in which we have no economic interest. His responsibilities to these other entities could result in action or inaction that is detrimental to our business, which could harm the implementation of our business strategy. He may face conflicts of interest in allocating his time among us and his other business ventures and in meeting his obligations to us and those other entities. His determinations in these situations may be more favorable to other entities than to us.

Possible future transactions with our management or their affiliates could create a conflict of interest, which could result in actions that are not in the long-term best interest of our stockholders.

Under prescribed circumstances, we may enter into transactions with affiliates of our management, including the borrowing and lending of funds, the purchase and sale of properties and joint investments. Currently, our policy is not to enter into any transaction involving sales or purchases of properties or joint investments with management or their affiliates, or to borrow from or lend money to such persons. However, our policies in each of these regards may change in the future.

We face system security risks as we depend on automated processes and the Internet.

We are increasingly dependent on automated information technology processes. While we attempt to mitigate this risk through offsite backup procedures and contracted data centers that include, in some cases, redundant operations, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack.

In addition, an increasing portion of our business operations are conducted over the Internet, putting us at risk from cybersecurity attacks, including attempts to make unauthorized transfers of funds, gain unauthorized access to our confidential data or information technology systems, viruses, ransomware, and other electronic security breaches. Such cyber-attacks may involve more sophisticated security threats that could impact day-to-day operations. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful at preventing a cyber-attack. Cybersecurity incidents could compromise confidential information of our tenants, employees and vendors and cause system failures and disruptions of operations.

Risks Related to Our Indebtedness

We have significant outstanding indebtedness, which requires that we generate sufficient cash flow to satisfy the payment and other obligations under the terms of our debt and exposes us to the risk of default under the terms of our debt.

Our total gross indebtedness as of June 30, 2020 was approximately $140.1 million. We may incur additional debt for various purposes, including, without limitation, to fund future acquisitions and operational needs.

The terms of our outstanding indebtedness provide for significant principal and interest payments. Our ability to meet these and other ongoing payment obligations of our debt depends on our ability to generate significant cash flow in the future. Our ability to generate cash flow, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that capital will be available to us, in amounts sufficient to enable us to meet our payment obligations under our loan agreements and to fund our other liquidity needs. If we are not able to generate sufficient cash flow to service these obligations, we may need to refinance or restructure our debt, sell unencumbered assets subject to defeasance or yield maintenance costs (which we may be limited in doing in light of the relatively illiquid nature of our properties), reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet these payment obligations, which could materially and adversely affect our liquidity. Our outstanding indebtedness, and the limitations imposed on us by the agreements that govern our outstanding indebtedness, could have significant adverse consequences, including the following:

If any one of these events was to occur, our business, results of operations and financial condition would be materially adversely affected.

The Polar Note requires interest-only payments before maturity and a balloon payment at maturity, which may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.

On September 17, 2019, we executed a promissory note (the “Polar Note”) for Polar Multi-Strategy Master Fund (“Polar”), who extended a loan in the principal amount of $14.0 million to us. The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments, along with a 4% renewal fee on the unpaid principal balance due October 1, 2020 upon extension of the maturity date. On September 1, we extended the maturity of the Polar Note from October 1, 2020 to March 31, 2021, at which time the entire outstanding principal balance of $8.8 million and accrued and unpaid interest will be due and payable. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan of the same principal amount. The principal balance of the Polar Note will not be reduced (except in the case of permitted prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required to make a lump-sum or “balloon” payment at maturity. The required balloon payment, which will become due in less than a year after this offering, may increase our risk of default under the Polar Note and reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to make the balloon payment (and interest payments) associated with the Polar Note.

Mortgage indebtedness and other borrowings increase our operational risks.

Loans obtained to fund property acquisitions will generally be secured by mortgages on our properties. The more we borrow, the higher our fixed debt payment obligations will be and the greater the risk that we will not be able to timely meet these payment obligations. At June 30, 2020, excluding our model home properties, we had a total of approximately $95.2 million of secured financing on our properties. If we are unable to make our debt payments as required, due to a decrease in rental or other revenues or an increase in our other costs, a lender could charge us a default rate of interest and/or foreclose on the property or properties securing its debt. This could cause an adverse effect on our results of operations and/or cause us to lose part or all of our investment, adversely affecting our financial condition by lowering the value of our real estate portfolio.

Lenders often require restrictive covenants relating to our operations, which adversely affects our flexibility and may affect our ability to achieve our investment objectives.

Some of our mortgage loans impose restrictions that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in properties. A number of loan documents contain covenants requiring us to maintain cash reserves or letters of credit under certain circumstances and limiting our ability to further mortgage the property, discontinue certain insurance coverage, replace the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

Financing arrangements involving balloon payment obligations may adversely affect our ability to pay distributions.

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. We may finance more properties that we acquire in this manner. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or to sell the property. When the balloon payment is due, we may not be able to refinance debt on favorable terms or sell the property at a price that would cover the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the value of our common stock.

In addition, making a balloon payment may leave us with insufficient cash to pay the distributions that are required to maintain our qualification as a REIT. At June 30, 2020, excluding our model homes business, we have three mortgages that require a balloon payment in 2021. The model homes division pays off the balance of its mortgages using proceeds from the sale of the underlying homes. Any deficiency in the sale proceeds would have to be paid from existing cash, reducing the amount available for distributions and operations.

Risks Related to our Status as a REIT and Related Federal Income Tax Matters

Failure to qualify as a REIT could adversely affect our operations and our ability to pay distributions.

We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2000. We believe that we have been organized and have operated in a manner that has allowed us to qualify for taxation as a REIT for federal income tax purposes commencing with such taxable year, and we expect to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments and dispositions, and the possibility of future changes in our circumstances, no assurance can be given that we will qualify for any particular year. If we lose our REIT qualification, we would be subject to federal corporate income taxation on our taxable income, and we could also be subject to increased state and local taxes. Additionally, we would not be allowed a deduction for distributions paid to stockholders. Moreover, unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified. The income tax consequences could be substantial and would reduce our cash available for distribution to stockholders and investments in additional real estate. We could also be required to borrow funds or liquidate some investments in order to pay the applicable tax. If we fail to qualify as a REIT, we would not be required to make distributions to our stockholders.

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal, state and local taxes on our income or property, including the following:

Our ownership of taxable REIT subsidiaries is subject to certain restrictions, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm’s length terms.

We own and may acquire direct or indirect interests in one or more entities that have elected or will elect, together with us, to be treated as our taxable REIT subsidiaries. A taxable REIT subsidiary is a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to U.S. federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s length basis.

A REIT’s ownership of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset tests applicable to REITs. Not more than 25% of the value of our total assets could be represented by securities, including securities of taxable REIT subsidiaries, other than those securities includable in the 75% asset test. Further, for taxable years beginning after December 31, 2017, not more than 20% of the value of our total assets may be represented by securities of taxable REIT subsidiaries. We anticipate that the aggregate value of the stock and other securities of any taxable REIT subsidiaries that we own will be less than 20% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable asset test limitations. In addition, we intend to structure our transactions with any taxable REIT subsidiaries that we own to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with these limitations or avoid application of the 100% excise tax discussed above.

We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution or other requirements or for working capital purposes.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. In order to maintain our REIT status or avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements, even if the then-prevailing market conditions are not favorable for these borrowings. To qualify as a REIT, in general, we must distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) each year. We have and intend to continue to make distributions to our stockholders. However, our ability to make distributions may be adversely affected by the risk factors described elsewhere herein. In the event of a decline in our operating results and financial performance or in the value of our asset portfolio, we may not have cash sufficient for distribution. Therefore, to preserve our REIT status or avoid taxation, we may need to borrow funds, sell assets or issue additional securities, even if the then-prevailing market conditions are not favorable. Moreover, we may be required to liquidate or forgo otherwise attractive investments in order to satisfy the REIT asset and income tests or to qualify under certain statutory relief provisions. If we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

In addition, we require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the Internal Revenue Service (“IRS”) would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

Legislative or other actions affecting REITs could have a negative effect on our investors or us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

U.S. tax legislation enacted in 2017 (the “2017 Tax Legislation”) has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the 2017 Tax Legislation that could affect us and our stockholders include:

Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the recent tax legislation as a whole will have on us. We urge our investors to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.

The stock ownership limit imposed by the Code for REITs and our charter may discourage a takeover that could otherwise result in a premium price for our stockholders.

In order for us to maintain our qualification as a REIT, no more than 50% in value of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To ensure that we do not fail to qualify as a REIT under this test, our charter restricts ownership by one person or entity to no more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our capital stock. This restriction may have the effect of delaying, deferring or preventing a change in control, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.

Dividends payable by REITs generally are taxed at the higher ordinary income rate, which could reduce the net cash received by stockholders and may be detrimental to our ability to raise additional funds through any future sale of our common stock.

Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates is generally subject to tax at reduced rates. However, dividends payable by REITs to its stockholders generally are not eligible for the reduced rates for qualified dividends and are taxed at ordinary income rates (but, under the 2017 Tax Legislation, U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026). Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the reduced rates continue to apply to regular corporate qualified dividends, investors that are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our common stock, and could be detrimental to our ability to raise additional funds through the future sale of our common stock.

Tax-exempt stockholders will be taxed on our distributions to the extent such distributions are unrelated business taxable income.

Generally, neither ordinary nor capital gain distributions should constitute unrelated business taxable income (“UBTI”) to tax-exempt entities, such as employee pension benefit trusts and individual retirement accounts. Our payment of distributions to a tax-exempt stockholder will constitute UBTI, however, if the tax-exempt stockholder has incurred debt to acquire its shares. Therefore, tax-exempt stockholders are not assured all dividends received will be tax-free.

Risks Related to Legal and Regulatory Requirements

Costs of complying with governmental laws and regulations may reduce our net income and the cash available for distributions to our stockholders.

Our properties are subject to various local, state and federal regulatory requirements, including those addressing zoning, environmental and land use, access for disabled persons, and air and water quality. These laws and regulations may impose restrictions on the manner in which our properties may be used or business may be operated, and compliance with these standards may require us to make unexpected expenditures, some of which could be substantial. Additionally, we could be subject to liability in the form of fines, penalties or damages for noncompliance, and any enforcement actions could reduce the value of a property. Any material expenditures, penalties, or decrease in property value would adversely affect our operating income and our ability to pay dividends to our stockholders.

The costs of complying with environmental regulatory requirements, of remediating any contaminated property, or of defending against claims of environmental liability could adversely affect our operating results.

Under various federal, state and local environmental laws, ordinances and regulations, an owner or operator of real property is responsible for the cost of removal or remediation of hazardous or toxic substances on its property. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated.

For instance, federal regulations require us to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials (“ACMs”), and potential ACMs on our properties. Federal, state, and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal of ACMs and potential ACMs, when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a property. There are or may be ACMs at certain of our properties. As a result, we may face liability for a release of ACMs and may be subject to personal injury lawsuits by workers and others exposed to ACMs at our properties. Additionally, the value of any of our properties containing ACMs and potential ACMs may be decreased.

Although we have not been notified by any governmental authority and are not otherwise aware of any material noncompliance, liability or claim relating to hazardous substances in connection with our properties, we may be found noncompliant in the future. Environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of any hazardous substances. Therefore, we may be liable for the costs of removing or remediating contamination of which we had no knowledge. Additionally, future laws or regulations could impose an unanticipated material environmental liability on any of the properties that we purchase.

The presence of contamination, or our failure to properly remediate contamination of our properties, may adversely affect the ability of our tenants to operate the contaminated property, may subject us to liability to third parties, and may inhibit our ability to sell or rent such property or borrow money using such property as collateral. Any of these occurrences would adversely affect our operating income.

Compliance with the Americans with Disabilities Act may require us to make unintended expenditures that could adversely impact our results of operations.

Our properties are generally required to comply with the Americans with Disabilities Act of 1990, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants. The parties to whom we lease properties are obligated by law to comply with the ADA provisions, and we believe that these parties may be obligated to cover costs associated with compliance. If required changes to our properties involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, our tenants may to be able to cover the costs and we could be required to expend our own funds to comply with the provisions of the ADA. Any funds used for ADA compliance will reduce our net income and the amount of cash available for distributions to our stockholders.

Risks Related to this Offering and an Investment in Our Company Generally

There is currently no public market for our Series A Common Stock. An active trading market for our Series A Common Stock may not develop following this offering.

There has not been any public market for our Series A Common Stock prior to this offering. We have been approved to list our Series A Common Stock on Nasdaq. We do not know the extent to which investor interest will lead to the development and maintenance of a liquid trading market. The initial public offering price for our Series A Common Stock will be determined by negotiation between us and the Underwriter. The price at which shares of our Series A Common Stock trade after the completion of this offering may be lower than the price at which the Underwriter sells them in this offering.

The market price and trading volume of our Series A Common Stock may be volatile following this offering, and you could experience a loss if you sell your shares.

Even if an active trading market develops for our Series A Common Stock, the market price of our Series A Common Stock may be volatile. In addition, the trading volume in our Series A Common Stock may fluctuate and cause significant price variations to occur. If the market price of our Series A Common Stock declines significantly, you may be unable to sell your shares at or above the public offering price. We cannot assure you that the market price of our Series A Common Stock will not fluctuate or decline significantly in the future.

Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our Series A Common Stock include:

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our Series A Common Stock could decline.

Prior to this offering, shares of our Series A Common Stock were not listed on any national securities exchange and the ability of stockholders to liquidate their investments was limited. As a result, there may be pent-up demand to sell shares of our Series A Common Stock. A large volume of sales of shares of our Series A Common Stock could further decrease the prevailing market price of such shares and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if sales of a substantial number of shares of our Series A Common Stock are not effectuated, the perception of the possibility of these sales could depress the market price for such shares and have a negative effect on our ability to raise capital in the future.

If our existing stockholders sell substantial amounts of our Series A Common Stock in the public market following this offering, the market price of our Series A Common Stock could decrease significantly. The perception in the public market that our existing stockholders might sell shares of Series A Common Stock could also depress our market price. Upon completion of this offering, we will have 9, 4 22,036 shares of Series A Common Stock outstanding, or 9,497 ,036 shares if the Underwriter exercises in full its option to purchase additional shares. Our directors, executive officers and certain additional other holders of our Series A Common Stock will be subject to the lock-up agreements described in “Underwriting” and the Rule 144 holding period requirements described in “Shares Eligible for Future Sale.” After all of the lock-up periods have expired, additional shares of our outstanding common stock will be eligible for sale in the public market. In addition, the underwriter may, at any time and without notice, release all or a portion of the shares subject to lock-up agreements. The market price of shares of our Series A Common Stock may drop significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of shares of our Series A Common Stock might impede our ability to raise capital through the issuance of additional shares of our Series A Common Stock or other equity securities and could result in a decline in the value of the shares of our Series A Common Stock purchased in this offering.

Market interest rates may have an adverse effect on the market price of our securities.

One of the factors that will influence the price of our Series A Common Stock will be the dividend yield on our common stock (as a percentage of the price of the stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our Series A Common Stock to expect a higher dividend yield, and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to fall.

Broad market fluctuations could negatively impact the market price of our Series A Common Stock.

Stock market price and volume fluctuations could affect the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performance. These fluctuations could reduce the market price of our Series A Common Stock. Furthermore, our results of operations and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations. Either of these factors could lead to a material decline in the market price of our Series A Common Stock.

The market price of our Series A Common Stock could be adversely affected by our level of cash distributions.

The market’s perception of our growth potential and our current and potential future cash distributions, whether from operations, sales or refinancings, as well as the real estate market value of the underlying assets, may cause our Series A Common Stock to trade at prices that differ from our net asset value per share. If we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our Series A Common Stock.

Our historical performance may not be indicative of our future results or an investment in our Series A Common Stock.

We have presented in this prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Prospectus Summary—Summary Historical Financial Data” certain information relating to the summary consolidated financial data for our company and our properties. When considering this information, you should bear in mind that our historical results are not indicative of the future results that you should expect from us or any investment in our common stock.

Future offerings of debt, which would be senior to our Series A Common Stock upon liquidation, and any preferred equity securities that may be issued and be senior to our Series A Common Stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our Series A Common Stock.

In the future, we may seek additional capital and commence offerings of debt or preferred equity securities, including medium-term notes, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Our preferred stock, if issued, could have a preference on liquidating distributions or dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, and consequently, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

A future issuance of stock could dilute the value of our Series A Common Stock.

We may sell additional shares of Series A Common Stock, or securities convertible into or exchangeable for such shares, in subsequent public or private offerings. Upon completion of this offering, there will be 9, 4 22,036 shares of our Series A Common Stock issued and outstanding. Those shares outstanding do not include the potential issuance, as of the date of this prospectus, of approximately 969,000 shares of our Series A Common Stock that will be available for future issuance under our 2017 Incentive Award Plan as of the completion of this offering. Future issuance of any new shares could cause further dilution in the value of our outstanding shares of Series A Common Stock. We cannot predict the size of future issuances of our Series A Common Stock, or securities convertible into or exchangeable for such shares, or the effect, if any, that future issuances and sales of shares of our Series A Common Stock will have on the market price of our Series A Common Stock. Sales of substantial amounts of our Series A Common Stock, or the perception that such sales could occur, may adversely affect prevailing market prices of our Series A Common Stock.

You will experience immediate and material dilution in connection with the purchase of our shares of Series A Common Stock in this offering.

As of June 30, 2020, the historical net tangible book value of our company was approximately $29.7 million, or $3.32 per share of common stock held by our existing investors. As a result, the pro forma net tangible book value per share of our Series A Common Stock after the completion of this offering will be less than the initial public offering price. The purchasers of shares of our Series A Common Stock offered hereby will experience immediate and substantial dilution of $1.6 9 per share in the pro forma net tangible book value per share of shares of our Series A Common Stock, based on an assumed public offering price of $5.00 per share. See “Dilution.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Property” and “Certain Relationships and Related Transactions.” Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, financial condition, liquidity, capital resources, cash flows, results of operations and other financial and operating information. When used in this prospectus, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Important factors that may cause actual results to differ from projections include, but are not limited to:

The forward-looking statements contained in this prospectus are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors described in “Risk Factors,” many of which are beyond our control. We believe that these factors include those described in “Risk Factors” or in our periodic filings with the SEC. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering, after deducting estimated underwriting discounts and commissions and offering expenses, will be approximately $ 1.5 million, or approximately $ 1.9 million if the Underwriter exercises in full its option to purchase additional shares of Series A Common Stock from us, assuming an initial public offering price of $5.00 per share. A $1.00 increase or decrease in the assumed initial public offering price of $5.00 per share would increase or decrease net proceeds to us from this offering by approximately $ 0.5 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same.

We intend to use the net proceeds for general corporate and working capital purposes, including to potentially acquire additional properties and reduce outstanding indebtedness.

DISTRIBUTION POLICY

We intend to operate in a manner that will allow us to continue to qualify as a REIT for federal income tax purposes. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its net taxable income, excluding net capital gains, and that it pay regular U.S. federal corporate income tax on any undistributed net taxable income, including net capital gains. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions that it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. For more information, please see “U.S. Federal Income Tax Considerations.”

We have paid distributions to our stockholders at least quarterly since the first quarter we commenced operations on April 1, 1999 through the second quarter of 2017 and declared distributions in the fourth quarter of 2018 and the first quarter of 2019, which were paid in the first quarter of 2019 and third quarter of 2019, respectively. To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we generally intend to continue making regular quarterly distributions to holders of our common stock. Although we anticipate making quarterly distributions to our stockholders over time, our Board of Directors has the sole discretion to determine the timing, form (including cash and shares of our common stock at the election of each of our stockholders) and amount of any distributions to our stockholders. As such, we cannot provide any assurance as to the amount or timing of future distributions. 

To the extent that we make distributions in excess of our earnings and profits, as computed for federal income tax purposes, these distributions will represent a return of capital, rather than a dividend, for federal income tax purposes. Distributions that are treated as a return of capital for federal income tax purposes generally will not be taxable as a dividend to a U.S. stockholder, but will reduce the stockholder’s basis in its shares (but not below zero) and therefore can result in the stockholder having a higher gain upon a subsequent sale of such shares. Return of capital distributions in excess of a stockholder’s basis generally will be treated as gain from the sale of such shares for federal income tax purposes.

To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, we could be required to fund distributions from working capital, sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. In addition, we could be required to utilize the net proceeds of this offering to fund our quarterly distributions, which would reduce the amount of cash that we have available for investing and other purposes. For more information, see “U.S. Federal Income Tax Considerations—Taxation of Our Company—Annual Distribution Requirements.”

Our charter allows us to issue preferred stock that could have a preference over our common stock with respect to distributions. We may issue additional preferred stock for various purposes, including, without limitation, to fund future acquisition and development activities and operational needs. The distribution preference on any issued preferred stock could limit our ability to make distributions to the holders of our common stock.

Distributions made by us will be authorized and determined by our Board of Directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and other factors described below. We cannot assure you that our distributions will be made or sustained or that our Board of Directors will not change our distribution policy in the future. Any distributions that we pay in the future will depend upon our actual results of operations, economic conditions, debt service requirements, capital expenditures and other factors that could differ materially from our current expectations. Our actual results of operations will be affected by a number of factors, including our revenue, operating expenses, interest expense and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, see “Risk Factors.”

The following is a summary of distributions declared per share for the years ended December 31, 2019, 2018 and 2017 after giving effect to the one-for-two reverse stock split:

No cash distributions have been declared during the six months ended June 30, 2020. During each of the years ended December 31, 2019 and December 31, 2018, respectively, we declared a cash distribution of approximately $1.1 million, or $0.12 per share after giving effect to the one-for-two reverse stock split. As we reported a net taxable gain for the year ended December 31, 2019, the cash distributions paid were reported as a distribution of taxable earnings and a return of capital.

RECAPITALIZATION

As of the date of this prospectus, there were 8,922,036 shares of our Series A Common Stock outstanding. Our Series A Common Stock is not traded on a national securities exchange. On July 29, 2020, we effectuated a one-for-two reverse stock split of our then outstanding shares of Series A Common Stock. Unless otherwise indicated, all information in this prospectus gives effect to, and all share and per share amounts have been retroactively adjusted to give effect to, the reverse stock split. The terms of our Series A Common Stock are described more fully under “Description of Capital Stock” in this prospectus. In this prospectus, we refer to the reverse stock split consummated prior to this offering as the “Recapitalization.” The Recapitalization had the effect of reducing the total number of outstanding shares of our Series A Common Stock.

CAPITALIZATION

The following table sets forth the historical combined cash and cash equivalents and capitalization of Presidio Property Trust, Inc. as of June 30, 2020 on an actual basis, and as adjusted to give effect to this offering and the intended use of the net proceeds from this offering as described in “Use of Proceeds.” You should read this table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this prospectus. All information in the following table has been adjusted to reflect the authorization of the Series A Common Stock and the reverse stock split.

DILUTION

Purchasers of shares of our Series A Common Stock offered in this prospectus will experience an immediate and substantial dilution in the net tangible book value per share of our common stock from the initial public offering price. As of June 30, 2020, after adjusting for the Recapitalization, we had a pro forma combined net tangible book value of $29.7 million, or $3.32 per share of our common stock. After giving effect to the sale of the shares of our common stock offered hereby, including the use of proceeds as described under “Use of Proceeds,” the deduction of underwriting discounts, the completion of the Recapitalization and the estimated offering expenses payable by us, the pro forma net tangible book value as of June 30, 2020 attributable to common stockholders, including the effects of the grants of awards covering shares of our common stock to our directors and executive officers, would have been $ 31.2 million, or $3. 31 per share of our common stock. This amount represents an immediate de crease in net tangible book value of $0.0 1 per share to prior investors and an immediate dilution in pro forma net tangible book value of $1.6 9 per share from the assumed initial public offering price of $5.00 per share of our common stock to new public investors. The following table illustrates this per share dilution:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those in this discussion as a result of various factors, including, but not limited to, those discussed under “Risk Factors” in this prospectus.

Overview

We are an internally managed, diversified REIT. We were incorporated in the State of California on September 28, 1999, and in June 2010, we reincorporated as a Maryland corporation. In October 2017, we changed our name from “NetREIT, Inc.” to “Presidio Property Trust, Inc.” Our current portfolio consists of approximately 1,129,738 square feet comprised of 10 office properties, one industrial property and four retail properties, which we refer to collectively as our commercial portfolio. In addition, we also own interests, through our subsidiaries, in 132 model homes subject to triple-net leases with well-established residential home builders with the majority located in Florida and Texas. This geographical clustering has enabled us to reduce our operating costs and gain efficiencies through economies of scale by managing a number of properties with reduced overhead and staffing costs. Beginning in 2015, we began to focus our commercial portfolio primarily on office and industrial properties. Our commercial portfolio currently consists of properties located in Southern California, Colorado and North Dakota, and we are currently considering new commercial property acquisitions in a variety of additional markets across the United States. Our commercial property tenant base is diversified, which helps limit our exposure to any single industry in which our tenants operate. As of June 30, 2020, our tenant base consists of 227 individual commercial tenants with an average remaining lease term of approximately 2.4 years. As of June 30, 2020, no commercial tenant represented more than approximately 6% of our annualized base rent, and our ten largest tenants represented approximately 29% of our annualized base rent.

Our main objective is to maximize long-term stockholder value through the acquisition, management, leasing and selective redevelopment of high-quality commercial properties. We focus on regionally dominant markets across the United States which we believe have attractive growth dynamics driven in part by important economic factors such as strong office-using employment growth; net in-migration of a highly educated workforce; a large student population; the stability provided by healthcare systems, government or other large institutional employer presence; low rates of unemployment; and lower cost of living versus gateway markets. We seek to maximize returns through investments in markets with limited supply, high barriers to entry, and stable and growing employment drivers. Our model home portfolio supports the objective of maximizing stockholder value by focusing on purchasing new single-family model homes and leasing them back to experienced homebuilders. We operate the model home portfolio in markets where we believe that there may be potential for price appreciation, and we can diversify by geography, builder size, and model home purchase price.

Outlook

On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic caused state and local governments within our areas of business operations to institute quarantines, “shelter-in-place” mandates, including rules and restrictions on travel and the types of businesses that may continue to operate. While certain areas begin to re-open, others have seen an increase in the number of cases reported, prompting local government to enforce further restrictions. We continue to monitor our operations and government recommendations and have modified our normal operations, including requiring our employees to work remotely with the exception of essential personnel.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law to provide widespread emergency relief for the economy and to provide aid to corporations. The CARES Act includes several significant provisions related to taxes, refundable payroll tax credits and deferment of social security payments.

We continue to evaluate the relief options for us and our tenants available under the CARES Act, as well as other emergency relief initiatives and stimulus packages instituted by the federal government. A number of the relief options contain restrictions on future business activities, including ability to repurchase shares and pay dividends, that require careful evaluation and consideration. We will continue to assess these options, and any subsequent legislation or other relief packages, including the accompanying restrictions on our business, as the effects of the pandemic continue to evolve. 

The effects of the COVID-19 pandemic did not significantly impact our operating results during the first or second quarter of 2020. We continue to monitor and communicate with our tenants to assess their needs and ability to pay rent. We have negotiated and are continuing to negotiate lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which have included or may include rent deferral, temporary rent abatement, or reduced rental rates and/or lease extension periods. While these amendments have affected our short-term cash flows, we do not believe they represent a change in the valuation of our assets for the properties affected and have not significantly affected our results of operations. Given the longevity of this pandemic, the COVID-19 outbreak may materially affect our financial condition and results of operations going forward, including, but not limited to, real estate rental revenues, credit losses, leasing activity, and potentially the valuation of our real estate assets. We expect that we may have additional rent deferrals, abatements and credit losses from our commercial tenants during the remainder of 2020 which may have a material impact on our real estate rental revenue and cash collections. We also expect that the effects of the COVID-19 pandemic will impact our ability to lease available commercial space. Our business operations and activities in many regions may be subject to future quarantines, “shelter-in-place” rules, and various other restrictions for the foreseeable future. Due to the uncertainty of the future impacts of the COVID-19 pandemic, the extent of the financial impact cannot be reasonably estimated at this time.

Significant Transactions in the Six Months Ended June 30, 2020 and the Year Ended December 31, 2019

Acquisitions

Dispositions

We review our portfolio of investment properties for value appreciation potential on an ongoing basis and dispose of any properties that no longer satisfy our requirements in this regard, taking into account tax and other considerations. The proceeds from any such property sale, after repayment of any associated mortgage, are available for investing in properties that we believe will have a greater likelihood of future price appreciation. We disposed of the following properties during the six months ended June 30, 2020 and the year ended December 31, 2019: 

Economic Environment

The United States economy is currently in an economic downturn with recessionary concerns as a result of COVID-19. The broad economic market conditions in the United States are typically affected by numerous factors, including inflation and employment levels, economic growth and/or recessionary concerns, energy prices, government fiscal, monetary, trade and tax policies, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit, and interest rates. As of the date of this prospectus, the impact of the COVID-19 pandemic and related fallout from containment and mitigation measures, such as stay-at-home orders and restrictions on non-essential business, is adversely affecting current economic conditions in the United States.

These adverse economic conditions could have a material effect on our business, financial condition, and results of operations.

Credit Market Environment

As a result of the economic fallout from COVID-19 that began in mid-March 2020, the Federal Reserve reduced the federal funds rate to a range of 0% to 0.25%, provided a new round of quantitative easing measures and opened short-term lending facilities to provide liquidity for the repurchase agreement and commercial paper markets. With the Fed actions, the Treasury yield curve fell dramatically as the benchmark 10-year Treasury note yield declined to 0.68% from 1.92% between the end of 2019 and the beginning of September 2020. Commercial mortgage markets are in a period of price discovery, with certain lenders remaining active. Interest rate floors have become commonplace, while underwriting and property-type criteria are often more stringent due to tenant credit, property cashflow and valuation concerns. Average commercial and multifamily spreads remained tight in the first two quarters of 2020, reflecting continuing momentum from the strong market conditions that existed prior to the onset of COVID-19.

Our ability to execute our business strategies, and in particular to make new investments, is highly dependent upon our ability to procure external financing. Our principal source of external financing includes the issuance of our equity securities and mortgages secured by properties. We continue to obtain mortgages from the commercial mortgage-backed securities (“CMBS”) market, life insurance companies and regional banks. Even though we have historically been successful in procuring equity and debt financing, we cannot be assured that we will be successful at doing so in the future.

Management’s Evaluation of Results of Operations

Our management team’s evaluation of operating results includes an assessment of our ability to generate cash flow necessary to pay operating expenses, general and administrative expenses, debt service, and to fund distributions to our stockholders including dividends. As a result, our management team’s assessment of operating results gives less emphasis to the effects of unrealized gains and losses and other non-cash charges, such as depreciation and amortization and impairment charges, which may cause fluctuations in net income for comparable periods but have no impact on cash flows. Our management team’s evaluation of our potential for generating cash flow includes assessments of our recently acquired properties, our non-stabilized properties, long-term sustainability of our real estate portfolio, our future operating cash flow from anticipated acquisitions, and the proceeds from the sales of our real estate assets.

In addition, our management team evaluates our portfolio and individual properties’ results of operations with a primary focus on increasing and enhancing the value, quality and quantity of properties in our real estate holdings. Our management team focuses its efforts on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals and rental rates. Properties that have reached goals in occupancy and rental rates are evaluated for potential added value appreciation and, if lacking such potential, are sold with the equity reinvested in properties that have better potential without foregoing cash flow. Our ability to increase assets under management is affected by our ability to raise borrowings and/or capital, coupled with our ability to identify appropriate investments.

The discussions of our results of operations in this prospectus are largely based on our consolidated results of operations for the six months ended June 30, 2020 and the year ended December 31, 2019. Although the COVID-19 pandemic did not significantly impact our operating results for the six months ended June 30, 2020, we expect that the effects of the COVID-19 pandemic may significantly adversely affect our business, financial condition, results of operations and cash flows in future periods, including but not limited to, real estate rental revenues, credit losses, and leasing activity, depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed under “Risk Factors.”

Our results of operations for the six months ended June 30, 2020 are not indicative of those expected in future periods, as we expect that rental income, interest expense, rental operating expense, general and depreciation and amortization will increase in future periods as a result of the assets acquired from the proceeds of this offering, subject to numerous factors, including those outlined in the section “Risk Factors”.

Critical Accounting Policies

As a company primarily involved in owning income generating real estate assets, management considers the following accounting policies critical as they reflect our more significant judgments and estimates used in the preparation of our financial statements and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

Real Estate Assets and Lease Intangibles

Land, buildings, and improvements are recorded at cost, including tenant improvements and lease acquisition costs (including leasing commissions, space planning fees, and legal fees). We capitalize any expenditure that replaces, improves, or otherwise extends the economic life of an asset, while ordinary repairs and maintenance are expensed as incurred. We allocate the purchase price of acquired properties between the acquired tangible assets and liabilities (consisting of land, building, tenant improvements, land purchase options, and long-term debt) and identified intangible assets and liabilities (including the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships), based in each case on their respective fair values.

We allocate the purchase price to tangible assets of an acquired property based on the estimated fair values of those tangible assets assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third-party valuations. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.

The value allocated to acquired lease intangibles is based on management’s evaluation of the specific characteristics of each tenant’s lease. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to the above-market or below-market market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease.

The value of in-place leases and unamortized lease origination costs are amortized to expense over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what we would have paid to a third party to secure a new tenant reduced by the expired term of the respective lease.

Real Estate Held for Sale

Real estate sold during the current period is classified as “real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. Mortgage notes payable related to the real estate sold during the current period is classified as “notes payable related to real estate held for sale” for all prior periods presented in the accompanying condensed consolidated financial statements. 

Impairment of Real Estate Assets

We review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exist or that depreciation periods should be modified. If circumstances support the possibility of impairment, we prepare a projection of the undiscounted future cash flows, without interest charges, of the specific property and determine if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property is written down to its estimated fair value based on our best estimate of the property’s discounted future cash flows.

Goodwill and Intangible Assets

Intangible assets, including goodwill and lease intangibles, are comprised of finite-lived and indefinite-lived assets. Lease intangibles represents the allocation of a portion of the purchase price of a property acquisition representing the estimated value of in-place leases, unamortized lease origination costs, tenant relationships and land purchase options.

Intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. Indefinite-lived assets are not amortized.

We test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset.

Sales of Real Estate Assets

Gains from the sale of real estate assets will not be recognized under the full accrual method until certain criteria are met. Gain or loss (the difference between the sales value and the book value) shall be recognized at the date of sale if a sale has been consummated and the following criteria are met:

Gains relating to transactions which do not meet the criteria for full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met or by using the installment or deposit methods of profit recognition, as appropriate in the circumstances.

Revenue Recognition

We recognize revenue from rent, tenant reimbursements, and other revenue once all of the following criteria are met:

Annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease. Estimated recoveries from certain tenants for their pro rata share of real estate taxes, insurance and other operating expenses are recognized as revenues in the period the applicable expenses are incurred or as specified in the leases. Other tenants pay a fixed rate and these tenant recoveries are recognized as revenue on a straight-line basis over the term of the related leases.

Certain of our leases currently contain rental rate increases at specified intervals. We record as an asset, and include in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rent receivable in the accompanying balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, our management determines to what extent the deferred rent receivable applicable to each specific tenant is collectible. We review material deferred rent receivable, as it relates to straight-line rents, and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, we record an increase in the allowance for uncollectible accounts, and write-off of the specific rent receivable. No such reserves related to deferred rent receivables have been recorded as of the six months ended June 30, 2020 or the year ended December 31, 2019.

Income Taxes

We elected to be taxed as a REIT under Sections 856 through 860 of the Code for federal income tax purposes commencing with our taxable year ended December 31, 2000. To maintain our qualification as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we maintain our qualification for taxation as a REIT, we are generally not subject to corporate level income tax on the earnings distributed currently to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates (including any applicable alternative minimum tax for taxable years beginning on or before December 31, 2017). We are subject to certain state and local income taxes.

We, together with one of our subsidiaries, have elected to treat such subsidiary as a taxable REIT subsidiary (“TRS”) for federal income tax purposes. Certain activities that we undertake must be conducted by a TRS, such as providing non-customary services for our tenants and holding assets that we cannot hold directly. A TRS is subject to federal and, if applicable, state and local income taxes.

Fair Value Measurements

Certain assets and liabilities are required to be carried at fair value, or if long-lived assets are deemed to be impaired, to be adjusted to reflect this condition. The guidance requires disclosure of fair values calculated under each level of inputs within the following hierarchy:

Level 1—Quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs other than quoted process that are observable for the asset or liability, either directly or indirectly.

Level 3—Unobservable inputs for the asset or liability.

Fair value is defined as the price at which an asset or liability is exchanged between market participants in an orderly transaction at the reporting date. Our cash equivalents, mortgage notes receivable, accounts receivable and payables and accrued liabilities all approximate fair value due to their short-term nature. Management believes that the recorded and fair values of notes payable as of June 30, 2020 are approximately the same as of December 31, 2019.

Depreciation and Amortization

We record depreciation and amortization expense using the straight-line method over the useful lives of the respective assets. The cost of buildings are depreciated over estimated useful lives of 39 years, the costs of improvements are amortized over the shorter of the estimated life of the asset or term of the tenant lease (which range from one to ten years), and the cost of furniture, fixtures and equipment are depreciated over four to five years.

Results of Operations for the Three Months Ended June 30, 2020 and 2019

Our results of operations for the three months ended June 30, 2020 and 2019 are not indicative of those expected in future periods as we expect that rental income, interest expense, rental operating expense and depreciation and amortization will fluctuate in future periods as a result of anticipated dispositions and growth through future acquisitions of real estate related investments.

The discussion that follows is based on our consolidated results of operations for the three months ended June 30, 2020 and 2019. Although the COVID-19 pandemic did not significantly impact our operating results for the three months ended June 30, 2020, we expect that the effects of the COVID-19 pandemic may significantly adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, real estate rental revenues, credit losses, and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed under “Risk Factors.”

Revenues. Total revenue was $6.1 million for the three months ended June 30, 2020 compared to $7.1 million for the same period in 2019, a decrease of $1.0 million or 14.0%, which is primarily due to a net decrease in rental income related to the sale of three properties in 2019 and two properties during the first quarter of 2020. The decrease in rental income is also attributed to COVID-19 related tenant workouts, which included rent abatements and deferrals that are being recognized over the remaining lease term.

Rental Operating Costs. Rental operating costs decreased by $526,000 to $2.0 million for the three months ended June 30, 2020, compared to $2.5 million for the same period in 2019. Rental operating costs as a percentage of total revenue also decreased to 32.7% as compared to 35.5% for the three months ended June 30, 2020 and 2019, respectively. The decrease in rental operating costs for the three months ended June 30, 2020 as compared to 2019 is due to the sale of three properties in 2019 and two properties during the quarter ended June 30, 2020, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.

General and Administrative Expenses. General & Administrative (“G&A”) expenses decreased by $141,000 for the three months ended June 30, 2020 compared to the same period in 2019. G&A expenses as a percentage of total revenue was 20.9% and 19.9% for three months ended June 30, 2020 and 2019, respectively. The decrease in G&A expenses for the three months ended June 30, 2020 as compared to 2019 is mainly due to a decrease in stock compensation expense.

Depreciation and Amortization.  Depreciation and amortization expense was $1.6 million for the three months ended June 30, 2020, compared to $1.7 million for the same period in 2019, representing a decrease of approximately $127,000 or 7.3%. The decrease in depreciation and amortization expense in 2020 compared to the same period in 2019 is primarily due to the sale of three properties in 2019 and two properties during the three months ended June 30, 2020, and the classification of two additional commercial properties as held for sale subsequent to June 30, 2019, upon which we ceased depreciation.

Asset Impairments. We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. During the three months ended June 30, 2020, we entered into lease renewal negotiations with a significant tenant at our Waterman Plaza retail property at a lower market rental rate than the rental rate being charged. We obtained a broker opinion of value that considered the lower market rental rates and subsequently determined there was a material change to undiscounted cash flows on the property as of June 30, 2020. Therefore, we recorded an $845,000 non-cash impairment in the Condensed Consolidated Statements of Operations during the three months ended June 30, 2020. Management considered the impact of COVID-19 on all remaining assets as of June 30, 2020 and determined that there was not sufficient data available to indicate an impairment had occurred as of that date.

Interest Expense - Series B Preferred Stock. The Series B Preferred Stock issued in August 2014 included a mandatory redemption provision and therefore, was treated as a liability for financial reporting purposes. The interest paid and accrued and the amortization of the deferred offering costs are considered interest expense. The Series B Preferred Stock was redeemed during 2019 and was no longer outstanding as of September 30, 2019. Interest expense, including amortization of the deferred offering costs, totaled $0.6 million for the three months ended June 30, 2019.

Interest Expense - mortgage notes. Interest expense, including amortization of deferred finance charges was $1.5 million for the three months ended June 30, 2020 compared to $1.9 million for the same period in 2019, a decrease of $387,000 or 20.8%. The decrease in mortgage interest expense relates to the decreased number of commercial properties owned in 2020 compared to 2019 and the related mortgage debt. The weighted average interest rate on our outstanding debt was 4.6% and 4.7% as of June 30, 2020 and 2019, respectively.

Interest expense - note payable. On September 17, 2019, we executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to us ("Polar Note"). The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and Original Issue Discount ("OID") of $1.4 million, totaled $796,000 for the three months ended June 30, 2020.

Gain on Sale of Real Estate Assets, net. The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See "Significant Transactions in 2020 and 2019" above for further detail.

Income allocated to non-controlling interests. Income allocated to non-controlling interests for the three months ended June 30, 2020 totaled approximately $315,000 when compared to the income allocated during the three months ended June 30, 2019 of $183,000. The increase is related to the gains on properties held in joint interest during the three months ended June 30, 2020.

Results of Operations for the Six Months Ended June 30, 2020 and 2019

Our results of operations for the six months ended June 30, 2020 and 2019 are not indicative of those expected in future periods as we expect that rental income, interest expense, rental operating expense and depreciation and amortization will fluctuate in future periods as a result of anticipated dispositions and growth through future acquisitions of real estate related investments.

Revenues. Total revenue was $13.2 million for the six months ended June 30, 2020 compared to $14.3 million for the same period in 2019, a decrease of $1.1 million or 8.0%. The decrease in revenue for the six months period is primarily due to a decrease in rental income related to the sale of three properties during the fourth quarter of 2019 and two properties during the first quarter of 2020 and COVID-19 related tenant workouts, which included rent abatements and deferrals.

Rental Operating Costs. Rental operating costs decreased $0.9 million, to $4.4 million for the six months ended June 30, 2020 from $5.3 million for the six months ended June 30, 2019. Rental operating costs as a percentage of total revenue was 33.3% and 37.0% for the six months ended June 30, 2020 and 2019, respectively. Rental operating costs as a percentage of total revenue decreased for the six months ended June 30, 2020 as compared to 2019 due to the sale of three properties in 2019 and two properties during the six months ended June 30, 2020, as well as the mix of properties held to include a higher percentage of model homes period over period, which have significantly lower operating costs.

General and Administrative Expenses. G&A expenses decreased by $550,000, or 17.3%, to $2.6 million for the six months ended June 30, 2020 compared to $3.2 million for the same period in 2019.  G&A expenses as a percentage of total revenue was 20.0% and 22.2% for the six months ended June 30, 2020 and 2019, respectively. The decrease in G&A expense is due to a decrease in stock compensation expense.

Depreciation and Amortization. Depreciation and amortization expense totaled $3.2 million for the six months ended June 30, 2020, compared to $4.0 million for the same period in 2019, representing a decrease of $0.8 million or 19.3%. The decrease in depreciation and amortization during the six months ended June 30, 2020 when compared to the same period in 2019 is primarily due to the sale of three properties in 2019 and two properties during the six months ended June 30, 2020, and the classification of two additional commercial properties as held for sale subsequent to June 30, 2019, upon which we ceased depreciation.

Asset Impairments. We review the carrying value of each of our real estate properties quarterly to determine if circumstances indicate an impairment in the carrying value of these investments exists. During the six months ended June 30, 2020, we entered into lease renewal negotiations with a significant tenant at our Waterman Plaza retail property at a lower market rental rate than the rental rate being charged. We obtained a broker opinion of value that considered the lower market rental rates and subsequently determined there was a material change to undiscounted cash flows on the property as of June 30, 2020. Therefore, we recorded an $845,000 non-cash impairment in the Condensed Consolidated Statements of Operations during the six months ended June 30, 2020. Management considered the impact of COVID-19 on all remaining assets as of June 30, 2020 and determined that no other impairments had occurred as of that date.

Interest Expense-Series B Preferred Stock. The Series B Preferred Stock issued in August 2014 included a mandatory redemption provision and therefore, was treated as a liability for financial reporting purposes. The interest paid and accrued and the amortization of the deferred offering costs are considered interest expense. The Series B Preferred Stock was redeemed and no longer outstanding as of September 30, 2019. Interest expense, including amortization of the deferred offering costs, totaled $1.3 million for the six months ended June 30, 2019.

Interest Expense-mortgage notes. Interest expense, including amortization of deferred finance charges was $3.2 million for the six months ended June 30, 2020 when compared to $3.8 million for the same period in 2019, a decrease of $596,000 or 15.8%. The decrease in interest relates to the decreased number of commercial properties owned in 2019 compared to 2019 and the related debt. The weighted average interest rate on our outstanding debt was 4.6% and 4.7% as of June 30, 2020 and 2019, respectively.

Interest expense - note payable. On September 17, 2019, we executed a Promissory Note pursuant to which Polar Multi-Strategy Master Fund (“Polar”), extended a loan in the principal amount of $14.0 million to us ("Polar Note"). The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. Interest expense, including amortization of the deferred offering costs and amortization of the Original Issue Discount ("OID") of $1.4 million, totaled $1.7 million for the six months ended June 30, 2020.

Gain on Sale of Real Estate Assets, net. The change in gain or loss on the sale of real estate assets is dependent on the mix of properties sold and the market conditions at the time of the sale. See “Significant Transactions in 2020 and 2019” above for further detail.

Income allocated to non-controlling interests.  Income allocated to non-controlling interests for the six months ended June 30, 2020 totaled approximately $490,000 when compared to the income allocated during the six months ended June 30, 2019 of $949,000. The decrease is related to the sale of 21 model home properties during the six months ended June 30, 2020 compared to 26 model home properties during the six months ended June 30, 2019, for which the decrease is primarily attributable to homes sold at a higher gain in 2019. 

Results of Operations for the Years Ended December 31, 2019 and 2018

The following discussion over our results of operations for all properties for the years ended December 31, 2019 and 2018 relates to continuing operations.

Revenues. Total revenue was $28.6 million for the year ended December 31, 2019, compared to $32.3 million for the same period in 2018, a decrease of $3.7 million or 11.4%. The decrease in rental income as reported in 2019 as compared to 2018 is directly related to the sale of three properties during the fourth quarter of 2018 and two properties in 2019. The decrease in rental income is partially offset by $473,000 related to the increase in overall occupancy to 84.5% as of December 31, 2019 compared to 83.4% for the same period in 2018.

Rental Operating Costs. Rental operating costs were $10.4 million for the year ended December 31, 2019 compared to $10.9 million for the same period in 2018, a decrease of $476,000 or 4.4%. Rental operating costs as a percentage of revenue remained consistent at 36.3% and 33.7% for the years ended December 31, 2019 and 2018, respectively. The increase in rental operating costs as a percentage of revenue was due to the following:

General and Administrative Expenses. G&A expenses were $5.3 million for the year ended December 31, 2019, compared to $4.5 million for the same period in 2018, representing a decrease of approximately $736,000 or 16.2%. As a percentage of total revenue, our G&A expenses were 18.4% and 14.0% for the years ended December 31, 2019 and 2018, respectively. The increase in G&A expense for the year ended December 31, 2019 compared to 2018 is due to an increase in non-cash stock compensation expense of $225,000 primarily for stock granted to new employees and officers in 2018 that vest ratably over the vesting period, some shares of which vested in January 2019, increases in employee compensation, legal expenses and additional expenses incurred due to the relocation of our corporate office in March 2019.

Depreciation and Amortization. Depreciation and amortization expenses were $7.4 million for the year ended December 31, 2019, compared to $9.1 million for the same period in 2018, representing a decrease of $1.7 million or 19.1%. The decrease in depreciation and amortization expenses is associated with the properties sold in 2019 and 2018.

Asset Impairments. We review the carrying value of each of our real estate properties annually to determine if circumstances indicate an impairment in the carrying value of these investments exists. There were no impairment charges during 2019. During 2018, we recognized an impairment charge of $533,000 on the Waterman Plaza property. This impairment charge reflects management’s estimate of the fair market value based on sales and leasing comps of like property in the same geographical area as well as an evaluation of future cash flows.

Interest Expense-Series B preferred stock. The Series B Preferred Stock issued in August 2014 included a mandatory redemption and therefore was treated as a liability for financial reporting purposes. The dividends paid and the amortization of the deferred offering costs are considered interest expense for reporting purposes under generally accepted accounting principles (“GAAP”). Dividends paid totaled $1.9 million and $4.4 million, respectively, for the years ended December 31, 2019 and 2018. The amortization of the deferred offering costs was approximately $122,000 and $147,000 for the years ended December 31, 2019 and 2018, respectively, and were included in Interest expense-Series B preferred stock. The deferred offering costs were fully amortized as of December 31, 2019. All of the outstanding Series B preferred stock was redeemed and no longer outstanding at December 31, 2019. As of December 31, 2018 there were 16,900 shares of Series B preferred stock outstanding.

Interest Expense-mortgage notes. Interest expense, including amortization of deferred finance charges, decreased by approximately $933,000, or 11.3%, to approximately $7.3 million for the year ended December 31, 2019 compared to $8.3 million for the same period in 2018. The decrease in interest expense relates to the decreased number of commercial properties owned in 2019 compared to 2018 and the related debt. The weighted average interest rate on our outstanding debt remained at 4.6% at December 31, 2019 and December 31, 2018.

Interest Expense-note payable. On September 17, 2019, we executed a promissory note pursuant to which Polar Multi-Strategy Master Fund (“Polar”) provided us a loan in the principal amount of $14.0 million (“Polar Note”). The Polar Note bears interest at a fixed rate of 8% per annum and requires monthly interest-only payments. On September 1, 2020, we exercised a one-time right to extend the maturity date of the Polar Note from October 1, 2020 to March 31, 2021, at which time the entire outstanding principal and accrued and unpaid interest will be due and payable. We used the proceeds of the Polar Note to redeem all of the outstanding shares of the 14% Series B preferred stock. For the year ended December 31, 2019, interest expense related to the Polar Note was approximately $1.1 million, which includes accretion of original issue discount (“OID”) of approximately $387,000 and amortization of deferred financing cost of approximately $373,000. As of December 31, 2019, the Polar Note payable was $12.2 million, net of unrecognized OID of $1.0 million and unamortized deferred financing cost of $748,000.

Gain on Sale of Real Estate Assets. For the year ended December 31, 2019, we recognized a net gain of approximately $6.3 million due to the sale of the following properties:

For the year ended December 31, 2018, we recognized a net gain of approximately $12.2 million due to the sale of the Port of San Diego Complex, Pacific Oaks Plaza, Yucca Valley Retail Center and 33 model homes. The sale of the Port of San Diego Complex and the Yucca Valley Retail Center resulted in a gain of approximately $11.4 million. The sale of Pacific Oaks Plaza resulted in a loss of approximately $232,000. The sale of 33 model homes resulted in a gain of approximately $988,000.

Income Tax Expense. For the year ended December 31, 2019, income tax expense increased by $93,000 to $611,000 compared to $519,000 for the year ended December 31, 2018. The increased income tax expense in 2019 is primarily due to additional federal and state taxes for capital gains from the sale of model homes held by the taxable REIT subsidiary.

Income from non-controlling interests. Income allocated to non-controlling interests for the year ended December 31, 2019 totaled $1.4 million compared to $1.1 million for the year ended December 31, 2018. The increase is related to more model homes sold in 2019 compared to 2018. We sold 41 model home properties for the year ended December 31, 2019 compared to 33 model home properties during the year ended December 31, 2018.

Liquidity and Capital Resources

Overview

As the local and global economies have weakened as a result of COVID-19, ensuring adequate liquidity is critical. We believe we have access to adequate resources to meet the needs of our existing operations and working capital, to the extent we are not funded by cash provided by operating activities. However, we expect the COVID-19 pandemic may adversely impact our future operating cash flows due to the inability of some of our tenants to pay their rent on time or at all. We have negotiated and are currently negotiating lease amendments with certain tenants who have demonstrated financial distress caused by the COVID-19 pandemic, which include rent deferral, temporary rent abatement, or reduced rental rates and/or lease extensions and may affect our short-term liquidity. The COVID-19 pandemic may also make financing more difficult for us to obtain, as well as for prospective buyers of our properties to obtain, resulting in difficulty in selling assets within our expected timeframe, or for our expected sales price.

Our anticipated future sources of liquidity may include existing cash and cash equivalents, cash flows from operations, refinancing of existing mortgages, future real estate sales, new borrowings, financial aid from government programs instituted as a result of COVID-19, and the sale of equity or debt securities. Our cash and restricted cash at June 30, 2020 was $8.7 million, which included our available liquidity of cash and cash equivalents of $6.0 million. We received an initial Economic Injury Disaster Loan of $10,000 on April 22, 2020, a Paycheck Protection Program loan of $462,000 on April 30, 2020 and an additional Economic Injury Disaster Loan of $150,000 on August 17, 2020, each from the Small Business Administration which will provide additional economic relief during the COVID-19 pandemic. We intend to use the funds for general corporate purposes and payroll related costs, respectively.

Our future capital needs include paying down existing borrowings, maintaining our existing properties, funding tenant improvements, paying lease commissions (to the extent they are not covered by lender-held reserve deposits), and the payment of dividends to our stockholders. We also are actively seeking investments that are likely to produce income and achieve long term gains in order to pay dividends to our stockholders. To ensure that we can effectively execute these objectives, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. We currently do not have a revolving line of credit but have been working to obtain such a line of credit.

Our short-term liquidity needs include paying down the remaining balance of the Polar Note, paying our current operating costs, satisfying the debt service requirements of our existing mortgages, completing tenant improvements, paying leasing commissions, and funding dividends to stockholders. For the six months remaining in 2020 and the year ending December 31, 2021, we have $6.2 million and $12.7 million of mortgage notes payable due, respectively, related to the model home properties. Certain model home properties will be sold and the underlying mortgage notes will be paid off with sales proceeds while other mortgage notes will be refinanced. For the six months remaining in 2020 and the year ending December 31, 2021, we have $882,000 and $16.4 million of mortgage notes payments due, respectively, related to the commercial properties. We plan to sell certain commercial properties or refinance a significant portion of the mortgage notes payable in the event the commercial property securing the respective mortgage note is not sold on or before maturity. We believe that the cash flow from our existing portfolio, distributions from joint ventures in model home partnerships and property sales during 2020 will be sufficient to fund our near-term operating costs, capital expenditures and future dividends that may be paid to stockholders. If our cash flow from operating activities is not sufficient to fund our short-term liquidity needs, we plan to fund a portion of these needs from additional borrowings of secured or unsecured indebtedness, from real estate sales, issuance of debt instruments, additional investors, or we will reduce the rate of dividends to the stockholders. During the six months ended June 30, 2020, we did not pay any cash dividends to our common stockholders.

Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that the potential financing capital available to us in the future is sufficient to fund our long-term liquidity needs. We are continually reviewing our existing portfolio to determine which properties have met our short- and long-term goals and reinvesting the proceeds in properties with better potential to increase performance. We expect to obtain additional cash in connection with refinancing of maturing mortgages and assumption of existing debt collateralized by some or all of our real property in the future to meet our long-term liquidity needs. If we are unable to arrange a line of credit, borrow on properties, issue debt instruments, privately place securities or sell securities to the public we may not be able to acquire additional properties to meet our long-term objectives.

Cash and Cash Equivalents

At June 30, 2020 and December 31, 2019, we had approximately $6.0 million and $5.7 million in cash equivalents, respectively, and $2.7 million and $4.7 million of restricted cash, respectively. Our cash equivalents and restricted cash consist of invested cash, cash in our operating accounts and cash held in bank accounts at third-party institutions. During 2020 and 2019, we did not experience any loss or lack of access to our cash or cash equivalents. Approximately $1.9 million of our cash balance is intended for capital expenditures on existing properties (net of deposits held in reserve accounts by our lenders). We intend to use the remainder of our existing cash and cash equivalents to pay off principal debt, for general corporate purposes or for dividends to our stockholders.

Secured Debt

As of June 30, 2020, we had one variable-rate mortgage note payable with a principal amount of $5.9 million and fixed-rate mortgage notes payable in the aggregate principal amount of $89.3 million, collateralized by a total of 15 commercial properties with loan terms at issuance ranging from 1 to 21 years. The weighted-average interest rate on these mortgage notes payable as of June 30, 2020 was approximately 4.6%, and our debt to estimated market value of these properties was approximately 57.7%.

As of June 30, 2020, we had 125 fixed-rate mortgage notes payable in the aggregate principal amount of $31.3 million, collateralized by a total of 125 model homes. These loans generally have a term at issuance of three to five years. As of June 30, 2020, the average loan balance per home outstanding and the weighted-average interest rate on these mortgage loans were approximately $250,000 and 4.3%, respectively. Our debt to estimated value on these properties is approximately 57.7%. The Company has guaranteed between 25% - 100% of these mortgage loans.

We have been able to refinance maturing mortgages to extend maturity dates and we have not experienced any notable difficulties financing our acquisitions.

Cash Flows for the Six Months Ended June 30, 2020 and 2019

Operating Activities: Net cash provided by operating activities for the six months ended June 30, 2020 decreased by approximately $2.2 million to approximately $0.2 million from $2.4 million for the six months ended June 30, 2019. The decrease in net cash provided by operating activities is due to a $3.3 million increase in payments on accrued liabilities and accounts payable recognized over the period which fluctuate based on timing of receipt, as well as a decrease in cash flows from tenants that received COVID-19 related abatements or deferrals, offset by a decrease of $1.1 million in gain on sale of real estate due to the timing and mix of properties sold.

Investing Activities: Net cash provided by investing activities during the six months ended June 30, 2020 was approximately $20.6 million compared to approximately $3.4 million during the same period in 2019. The increase primarily related to gross proceeds from the sale of two office buildings for approximately $26.3 million, and $8.0 million from the sale of 21 model homes as well as a decrease in capital expenditures of approximately $2.4 million year over year due to timing of capital expenditures during the COVID-19 pandemic. During the six months ended June 30, 2019, we received gross proceeds from sales of 26 model homes for approximately $9.4 million and gross proceeds of $5.4 million from the sale of one office building.

We currently project that we could spend up to $1.9 million (net of deposits held in reserve accounts by lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio on an annual basis. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Financing Activities: Net cash used in financing activities during the six months ended June 30, 2020 was $22.5 million compared to $3.9 million for the same period in 2019 and was primarily due to the following activities for the six months ended June 30, 2020:

Cash Flows for the years ended December 31, 2019 and 2018

Operating Activities: Net cash provided by operating activities for the year ended December 31, 2019 increased by $3.4 million to approximately $3.8 million from $432,000 for the year ended December 31, 2018. The increase in net cash provided by operating activities is primarily due to a decrease in accounts receivable in 2019 for the proceeds from the sale of Yucca Valley Retail Center that closed at the end of 2018 and a decrease in interest expense related to the Series B preferred stock.

Investing Activities: Net cash provided by investing activities during the year ended December 31, 2019 decreased by $13.6 million to approximately $12.0 million compared to $25.6 million for the same period in 2018. During the year ended December 31, 2019, we received gross proceeds from the sale of two office buildings for approximately $17.9 million, sale of land for $875,000 and sales of 41 model homes for approximately $14.6 million, which was offset by the purchase of 33 model homes for approximately $13.0 million and capital expenditures of approximately $6.4 million primarily related to tenant improvements for the new Chuze Fitness tenant at World Plaza. During the year ended December 31, 2018, we purchased 45 model homes for $17.3 million and received proceeds from the sale of 33 model homes and three commercial properties totaling approximately $47.2 million.

We currently project that we could spend up to $2.4 million (net of deposits held in reserve accounts by lenders) on capital improvements, tenant improvements and leasing costs for properties within our portfolio on an annual basis. Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to the properties. We may spend more on capital expenditures in the future due to rising construction costs and the anticipated increase in property acquisitions. Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Financing Activities: Net cash used in financing activities during the years ended December 31, 2019 was $15.2 million compared to cash provided of $24.6 million for the same period in 2018. The decrease of $9.4 million in net cash used in financing activities is primarily due to the following activities for the year ended December 31, 2019:

Off-Balance Sheet Arrangements

As of June 30, 2020, we do not have any off-balance sheet arrangements or obligations, including contingent obligations.

Non-GAAP Supplemental Financial Measures

Funds From Operations

Management believes that Funds From Operations (“FFO”) is a useful supplemental measure of our operating performance. We compute FFO using the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss) in accordance with GAAP, plus depreciation and amortization of real estate assets (excluding amortization of deferred financing costs and depreciation of non-real estate assets) reduced by gains and losses from sales of depreciable operating property and extraordinary items, as defined by GAAP. Other REITs may use different methodologies for calculating FFO and, accordingly, our FFO may not be comparable to other REITs. Because FFO excludes depreciation and amortization, gains and losses from property dispositions that are available for distribution to stockholders and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, our management team believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs. However, FFO should not be viewed as an alternative measure of our operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties which are significant economic costs and could materially impact our results from operations.

Modified Funds From Operations

We define Modified Funds From Operations (“MFFO”), a non-GAAP measure, consistent with the Investment Program Association’s (“IPA”) Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REIT Modified Funds From Operations (which we refer to as the Practice Guideline), issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above-market and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above-market and below-market leases, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to our stockholders. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of MFFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

The following table presents our FFO and MFFO for the three and six months ended June 30, 2020 and 2019:

The following table presents our FFO and MFFO for the years ended December 31, 2019 and 2018:

No conclusion or comparisons should be made from the presentation of these figures.

Same-Store Property Operating Results for the Three and Six Months Ended June 30, 2020 and 2019

The table below presents the operating results for our commercial properties owned as of January 1, 2020 for the six months ended June 30, 2020 and 2019, thereby excluding the impact on our results of operations from the real estate properties acquired subsequently. The table below excludes model home operations as the rental rates during the term of these leases are fixed and operating expenses are the tenants’ responsibility. We believe that this type of non-GAAP financial measure, when considered with our financial statements prepared in accordance with GAAP, allows investors to better understand our operating results. Properties are included in this analysis if they were owned and operated for the entirety of both periods being compared. Further, same-store property operating results is a measure for which there is no standard definition and, as such, it is not consistently defined or reported on among our peers, and thus may not provide an adequate basis for comparison between REITs.

We evaluate the performance of its same-store property operating results based upon net operating income from continuing operations (“NOI”), which is a non-GAAP supplemental financial measure. We define NOI as operating revenues (rental income, tenant reimbursements and other operating income) less property and related expenses (property operating expenses, real estate taxes, insurance and provision for bad debt) less interest expense. NOI excludes certain items that are not considered to be controllable in connection with the management of an asset such as non-property income and expenses, depreciation and amortization, asset management fees and corporate general and administrative expenses. We believe that net income is the GAAP measure that is most directly comparable to NOI; however, NOI should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes the items described above. Additionally, NOI as defined above may not be comparable to other REITs or companies as their definitions of NOI may differ from our definition.

Overview

Same-store property NOI increased 5.4% for the three months ended June 30, 2020 compared to the corresponding period in 2019 primarily due to increased occupancy rates and lower rental operating cost. Rental revenues for the three months ended June 30, 2020 increased by 3.5% compared to the same period in 2019.

Same-store property NOI increased 10.4% for the six months ended June 30, 2020 compared to the corresponding period in 2019 primarily due to increased occupancy rates and lower rental operating cost. Rental revenues for the six months ended June 30, 2020 increased by 6.6% compared to the same period in 2019.

These increases rental revenues are primarily due to the replacement of a major tenant at World Plaza, bringing that property to 100% occupancy from 22% during the previous period as well as increases in occupancy of between 4% - 7% at Genesis Plaza, Grand Pacific Center, and One Park Center, offset by decreases in occupancy at Waterman Plaza of 14% and at Dakota Center of 12%.

Leasing

Our same-store NOI increase for the six months ended June 30, 2020 compared to the corresponding period in 2019 was primarily driven by increased occupancy rates and lower rental operating cost. Over the long-term, we believe that the infill nature and strong demographics of our properties have provided us with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates. We have continued to see signs of improvement for many of our tenants as well as increased interest from prospective tenants for our spaces. While there can be no assurance that these positive signs will continue, we remain cautiously optimistic regarding the trends we have seen over the past few years. We believe the locations of our properties and diverse tenant base mitigate the potentially negative impact of a poor economic environment, including that which has arisen due to COVID-19. However, any reduction in our tenants’ abilities to pay base rent, percentage rent or other charges during the COVID-19 pandemic, may adversely affect our financial condition and results of operations.

During the three months ended June 30, 2020, we signed seven comparable leases (one new lease and six lease renewals) for a total of 11,946 square feet of comparable space, at an average rental rate increase of 3.2% on a cash basis due to rent abatement periods and an average rental increase of 10.9% on a straight-line basis. New leases for comparable office spaces were signed for 1,351 square feet at an average rental rate increase of 7.7% on a cash basis due to rent abatement periods and increase of 30.4% on a straight-line basis. Renewals for comparable office spaces were signed for 10,595 square feet at an average rental rate increase of 2.5% on a cash basis and increase of 8.2% on a straight-line basis.

During the six months ended June 30, 2020, we signed 19 comparable leases (five new leases and 14 lease renewals) for a total of 58,791 square feet of comparable space, at an average rental rate decrease of 5.6% on a cash basis due to rent abatement periods and an average rental increase of 9.2% on a straight-line basis. New leases for comparable office spaces were signed for 11,921 square feet at an average rental rate decrease of 23.7% on a cash basis due to rent abatement periods and increase of 5.3% on a straight-line basis. Renewals for comparable office spaces were signed for 46,870 square feet at an average rental rate decrease of 1.0% on a cash basis and increase of 10.1% on a straight-line basis.

Impact of Downtime and Rental Rate Changes

The downtime between lease expiration and new lease commencement, typically ranging from six to 24 months, can negatively impact total NOI and same-store property NOI. In addition, commercial property leases, both new and renewal, typically contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced. If we are unable to replace expiring leases with new or renewal leases at rental rates equal to or greater than the expiring rates, rental rate roll downs can also negatively impact total NOI and same-store property NOI comparisons. Our geographically diverse portfolio model results in rent renewal rates that can fluctuate widely on a market by market basis; however, given the volume of leasing activity over the last several years, we estimate that our portfolio, taken as a whole, is currently at market. Total NOI and same-store property NOI comparisons for any given period may still fluctuate as a result of rent roll ups and roll downs, however, depending on the leasing activity in individual geographic markets during the respective period.

Same-Store Property Operating Results for the years ended December 31, 2019 and 2018

The table below presents the 2019 and 2018 operating results for our commercial rental properties owned as of December 31, 2019 and for year ended December 31, 2018. The table below excludes model home operations as the rental rates during the term of the lease are fixed and operating expenses are tenants’ responsibility. We believe that this type of non-GAAP financial measure, when considered with our financial statements prepared in accordance with GAAP, is useful to investors to better understand our operating results. Properties are included in this analysis if they were owned and operated for the entirety of both periods being compared. Further, same-store property operating results is a measure for which there is no standard definition and, as such, it is not consistently defined or reported on among our peers, and thus may not provide an adequate basis for comparison between REITs.

Overview

Same-store property NOI increased by 1.1% for the year ended December 31, 2019 as compared to the corresponding period in 2018 as evidenced by the increase in rental revenues of 3.0%. Rental revenues increased due to higher same-store property occupancy of 84.8% for the year ended December 31, 2019 compared to 80.8% for the same period in 2018. Rental operating costs as a percentage of total revenues increased approximately 5.8% for the year ended December 31, 2019 compared to the same period in 2018.

Leasing

Our same-store NOI increase for the six months ended June 30, 2020 compared to the corresponding period in 2019 was primarily driven by increased occupancy rates and lower rental operating cost. Over the long-term, we believe that the infill nature and strong demographics of our properties have provided us with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates. We have continued to see signs of improvement for many of our tenants as well as increased interest from prospective tenants for our spaces. While there can be no assurance that these positive signs will continue, we remain cautiously optimistic regarding the trends we have seen over the past few years. We believe the locations of our properties and diverse tenant base mitigate the potentially negative impact of a poor economic environment, including that which as has arisen due to COVID-19. However, any reduction in our tenants’ abilities to pay base rent, percentage rent or other charges during the COVID-19 pandemic, may adversely affect our financial condition and results of operations. Our same-store property growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy. Over the long-term, we believe that the infill nature and strong demographics of our properties provide us with a strategic advantage, allowing us to maintain relatively high occupancy and increase rental rates. We have continued to see signs of improvement for many of our tenants as well as increased interest from prospective tenants for our spaces. While there can be no assurance that these positive signs will continue, we remain cautiously optimistic regarding the improved trends we have seen over the past few years. We believe the locations of our properties and diverse tenant base mitigate the potentially negative impact of a poor economic environment. However, any reduction in our tenants’ abilities to pay base rent, percentage rent or other charges, may adversely affect our financial condition and results of operations.

During the quarter ended December 31, 2019, we signed 21 leases (15 new leases and 6 renewals) for a total of 65,214 square feet of space leases, of which 34,913 square feet related to comparable leases. Comparable leases signed had an average rental rate decrease of 6.9% on a cash basis and an average rental rate increase of 10.5% on a straight-line basis. New office leases for comparable spaces were signed for 16,254 square feet at an average rental rate decrease of 11.1% on a cash basis and an average rental rate increase of 18.0% on a straight-line basis. Renewals for comparable office spaces were signed for 18,659 square feet at an average rental rate decrease of 1.8% on a cash basis and increase of 2.4% on a straight-line basis. Non-comparable new leases were signed for 30,301 square feet.

During the year ended December 31, 2019, we signed 78 leases (49 new leases and 29 renewals) for a total of 270,724 square feet of space leases, of which 132,534 square feet related to comparable leases. Comparable leases signed had an average rental rate increase of 3.2% on a cash basis and an average rental rate increase of 18.5% on a straight-line basis. New office leases for comparable spaces were signed for 36,915 square feet at an average rental rate increase of 10.0% on a cash basis and an average rental rate increase of 25.9% on a straight-line basis. Renewals for comparable office spaces were signed for 95,619 square feet at an average rental rate increase of 0.5% on a cash basis and increase of 16.0% on a straight-line basis. Non-comparable new leases were signed for 138,190 square feet.

Impact of Downtime and Rental Rate Changes

The downtime between a lease expiration and a new lease commencement, typically ranging from six to 24 months, can negatively impact total NOI and same-store property NOI. In addition, office leases, both new and lease renewals typically contain upfront rental and /or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced. If we are unable to replace expiring leases with new or renewal leases at rental rates equal to or greater than the expiring rates, rental rate roll downs can also negatively impact total NOI and same-store property NOI comparisons. Our geographically diverse portfolio model results in rent roll ups that can fluctuate widely on a market by market basis; however, given the large volume of leasing activity over the last several years, we estimate that our portfolio, taken as a whole, is currently at market. Total NOI and same-store property NOI comparisons for any given period may still fluctuate as a result of rent roll ups and roll downs, however, depending on the leasing activity in individual geographic markets during the respective period.

MARKET OVERVIEW

Market Opportunity

The U.S. economy experienced consistent economic expansion and job growth from the second quarter of 2009 until the arrival of the COVID-19 pandemic. Gross Domestic Product (“GDP”) increased at an annualized rate of 4.1% during this period, according to the Federal Reserve. Due to the COVID-19 pandemic, the first quarter of 2020 saw the first contraction of GDP in over ten years, at an annual rate of -4.8%, followed by a 32.9% contraction in the second quarter due to the strict stay-at-home orders and the closing of non-essential businesses to “flatten the curve” of the COVID-19 pandemic.

The COVID-19 pandemic has impacted most regions of the country. The states that first experienced business shutdowns have started to reopen to varying degrees. Our investment focus is on select markets which we believe contain the favorable demographic and business attributes to drive economic growth and the demand for institutional quality real estate. These secondary and tertiary markets are less populated than the primary markets, which should be an attractive feature in the COVID-19 environment.

Our target markets include Columbus, Kansas City, Minneapolis, and Salt Lake City. Each of these target markets is located in a state that has not been one of the hardest hit states by the COVID-19 pandemic and is in the process of reopening.

U.S. Economic Outlook

On March 11, 2020, the World Health Organization declared COVID-19, a respiratory illness caused by the novel coronavirus, a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has caused state and local governments within our areas of business operations to institute quarantines, “shelter-in-place” mandates, including rules and restrictions on travel and the types of businesses that may continue to operate. We continue to monitor our operations and government recommendations and have modified our normal operations, including requiring our employees to work remotely with the exception of essential personnel.

Since the declaration, the United States economy has experienced an economic downturn with recessionary concerns as a result of COVID-19. Because the trigger of the downturn is a global health crisis, it is very difficult to say how long the recession will last or how the recovery will unfold. However, some forecasters expect the recovery to be strong as a result of the decline being caused by the shuttering of whole sectors and regions of the economy. As those industries and localities come back online and people begin resuming daily activity, suppressed spending is expected to bounce back. Also, the Federal Reserve and the U.S. Congress have provided aggressive stimulus packages to support the economy including approximately $2.2 trillion in fiscal stimulus, by far the largest stimulus package in U.S. history, and lowering interest rates to near zero. Our strategy focuses on non-gateway markets, which we believe present opportunities for above-average economic growth as well as the ability to achieve attractive asset pricing with little new supply.

Office Real Estate Fundamentals

Overview

The COVID-19 pandemic forced some states to impose strict stay-at-home orders that adversely affected many industries. This caused the U.S. GDP to decline in the first half of 2020 and increased job losses, particularly in the retail, food and beverage and transportation sectors. However, most job losses were reported as “temporary” and should begin returning in the third quarter of 2020 as an expected economic recovery takes hold.

A drop in U.S. office leasing activity as well as a significant increase in lease renewals were two signs of COVID-19’s impact on office markets in the first quarter of 2020. However, office markets generally remained stable despite an increase in overall vacancy rates. According to CBRE, new supply outpaced demand in the first quarter of 2020, causing the overall office vacancy rate to increase by 20 basis points, which was not unexpected due to the late stage of the economic expansion. In the second quarter of 2020, the office vacancy rate increased by an additional 40 basis points.

U.S. Metro Office Supply and Demand

The overall downtown vacancy rate increased 80 basis points in the second quarter of 2020, up from 30 basis points in the first quarter to a total of 11.4%. The suburban office vacancy rate rose by 60 basis points in the second quarter, up from 10 basis points in the first quarter to a total of 13.8%. Despite the vacancy increase in the second quarter of 2020, average rents for the second quarter of 2020 rose by 0.3% year-over-year.

U.S. Metro Rent Growth and Vacancy Rate

Capitalization rates (“cap rates”) for office properties increased by two basis points during the second quarter of 2020, according to a CBRE market survey. Average cap rates were 7.07% nationally for office buildings. We believe that cap rates in select secondary markets will provide higher initial returns on cost with cap rate compression as investors seek higher returns than can be achieved in gateway markets. Even with the impact of COVID-19, National Association of Realtor’s Commercial Real Estate Trends & Outlook report in April 2020 indicated that cap rates remained on the downward trend in the first quarter of 2020.

U.S. Office CBD – Historical Cap Rates

Industrial Real Estate Fundamentals

Overview

According to CBRE, despite the COVID-19 pandemic, robust fundamentals in the first quarter of 2020 showed that the U.S. industrial market was on solid ground. Although market conditions have shifted considerably since mid-March 2020, there was strong evidence of industrial sector resiliency in the second quarter, as net absorption was 19.1 million square feet, representing the 41st consecutive quarter of positive net absorption. National net asking rates grew 1.0% quarter-over-quarter and 6.3% year-over-year in the second quarter of 2020 at an average of $7.96 per square foot. While construction has outpaced net absorption for the past five quarters, a majority of this new space had been taken prior to completion of construction, keeping availability rates stable.

U.S. Industrial Supply & Demand

Industrial demand is highest for warehouse and distribution space, year-to-date net absorption of which totals nearly 70 million sf. This is more than the industrial sector’s overall gain because of negative absorption in other categories like manufacturing. Overall, we believe the market will remain stable as e-commerce penetration continues to impact supply chains. E-commerce, food & beverage, and home improvement companies continue to drive lease activity as they expand in several industrial hubs. The food industry is undergoing significant disruption from COVID-19, as U.S. consumers increasingly have groceries delivered to their homes (D2C) or are buying online and picking up in store. According to CBRE, this will increase demand for cold-storage space. As the U.S. economy restarts, adjustments to business supply chains will increase the demand for warehouse space. Additionally, businesses may create more domestic supply chains as they re-shore or near-shore production. The increased demand in the U.S. industrial market has resulted in continued rent growth as highlighted in the chart below:

U.S. Industrial Rent Growth

According to CBRE, average asking rents continue to rise, finishing midyear at $7.96 per sf, 6.3% higher than the same time last year, and warehouse/distribution rents rose 5.6% year-over-year to an average of $6.68 per sf.. both of which are all-time highs. The adaptation of consumers to online commerce has driven demand for logistics properties. Additionally, developing trends point to a strong near-to medium-term outlook for the light industrial sector representing properties smaller than 200,000 square feet, according to CBRE. Consumer demand for next day delivery is translating into smaller regional facilities that can provide next day fulfillment of goods. We believe that millennials who are migrating to regional growth markets are increasing the demand for e-commerce next day delivery, which will have a positive effect on industrial property demand. Furthermore, the rising use of e-commerce is expected to create additional warehouse demand as consumers continue social distancing even after states and cities reopen their economies.

Increased e-commerce has a positive impact on warehouse demand as it tends to transfer retail tenants to warehouses. According to the Census Bureau, U.S. e-commerce totaled $211.5 billion in the second quarter of 2020, a 31.8% growth from the first quarter of 2020. E-commerce represented 16.1% of total retail sales in the second quarter of 2020. We believe that consumer preferences will continue to increase the percentage of e-commerce transactions and the number of warehouse and logistics properties required to fulfill demand. With the massive increase in online sales over the past 15 years, e-commerce companies have had to make major investments in infrastructure and facilities to keep pace with demand. This trend is expected to continue, as online sales keep growing with traditional brick and mortar retailers employing multi-channel sale strategies. Additionally, this emergence of e-commerce and the growth of internet retailers and wholesalers are expanding the universe of tenants seeking industrial space in our target markets, which should drive demand and rent growth into the future.

We believe that the continued growth in demand for industrial properties and the limited growth in new construction will have a positive impact on our industrial properties. Although leasing activity may slow in the coming quarters, industrial demand will be bolstered by greater inventory controls, supply chain diversification and e-commerce growth.

Housing Fundamentals

Despite the COVID-19 pandemic, demand for single-family homes has risen. According to the Commerce Department, new single-family home sales rose 13.9% from June to July 2020. Additionally, single-family housing starts rose 8.2% over the same period. Home builders have seen an increase in demand as well due to the rising number of millennials buying homes, according to the National Association of Realtors. 

Our Target Markets

We seek to invest in commercial properties in regionally dominant markets that we believe will outperform other markets due to attractive growth dynamics driven in party by economic factors such as strong office-using employment growth; net in-migration of a highly educated workforce; large student population; the stability provided by healthcare systems, government or other large institutional employer presence; low rates of unemployment; and lower cost of living versus gateway markets. We seek regionally dominant markets that are typically not the primary focus of large institutional investors and other REITs. Our target markets feature the physical and intellectual infrastructure to attract and retain the human capital that drives a knowledge-based economy with less emphasis on production and greater focus on ideas and information. Our markets typically have strong public policy initiatives designed to enhance economic growth, such as low-cost centers for business, transportation infrastructure, walkable urban centers, significant cultural attractions, quality of life services, connectivity, and technology. We seek markets that also have key components of human capital development and retention, such as research universities, healthcare centers, financial services industries, software development, and media companies.

Within our target markets, we expect to primarily focus on acquiring commercial properties with a purchase price between $10 million and $30 million in order to limit competition from both large and well capitalized buyers focused on core markets. We believe that it is challenging for many local buyers in our target markets to raise the debt and equity capital necessary to complete real estate transactions in excess of $10 million.

The growth in jobs since the recession has not been spread evenly across the country. We believe that secondary and tertiary metropolitan areas have stable and growing segments of the economy, such as technology, and are creating jobs at a faster rate than the nation as a whole. As companies continue to look for ways to reduce costs in the wake of the recession, more jobs seem to be shifting to areas with lower costs of living, doing business, and real estate. Our target markets include areas meeting these criteria.

We are currently considering commercial property acquisitions in the following target markets:

Columbus

Columbus, Ohio has enjoyed substantial gains in employment in the past five years, as approximately 150 companies have moved into the area. According to Forbes, Columbus was rated the top metro area for hiring in the Midwest and second highest in the nation. We believe these employers were likely drawn to the highly educated workforce supported with over 50 college and university campuses located in the area. Additionally, a young demographic—nearly 20% of residents fall in range of ages 25-34—has driven the city’s technology sector, which is ranked in the top 15 in the United States by the Comptia Tech Town Index in 2019. Nearly 18% of the population works in professional and business services, the most popular sector for employment in the city.

Columbus Office Market

According to Cushman & Wakefield, Columbus incentives attracted $1.1 billion in office and industrial development projects which will result in 4,400 new jobs while retaining 3,600 jobs in 2019. The Columbus office market recorded 44,000 sf in net absorption in the second quarter of 2020. Vacancy rates were 17.9% in the second quarter of 2020 marking in increase of 4.0% on an annual basis. The increase is mainly driven by the addition of fifty office buildings in the city. Colliers reports that national and international firms have continued to gain interest in Columbus’s skilled workforce, strategic location, and emphasis on development.

Columbus Industrial Market

According to CBRE, the Columbus industrial market finished the second quarter of 2020 with net absorption of 800,000 square feet. The vacancy rate increased to 7.4%.

Kansas City

Kansas City, Missouri has seen net migration come into the city with the population increasing since 2010. According to Cushman & Wakefield, 2019 was a robust year for the Kansas City commercial real estate market. The absorption numbers for both office and industrial space remained strong, and vacancy rates for both product types are at low levels that should support continued investment. Furthermore, new players have been looking to establish a presence and inject capital into the market while becoming increasingly creative about how they develop their projects. Prior to the impact of COVID-19 on employment in March 2020, the monthly unemployment level had not been above 4.5% since August 2016. Kansas City earned a spot on Business Facilities’ “2019 Metro Rankings Report” as a top 10 city for economic growth potential.

Kansas City Office Market

In June 2019, the United States Department of Agriculture announced plans to move over 500 jobs from the Washington, D.C. area to Kansas City. In the suburbs, the South Kansas City submarket continues to be a quiet, under-the-radar performer, averaging 47,000 sf of absorption per year and the vacancy rate has decreased from 14.2% to 9.7%. Net absorption has outpaced new construction leading to low vacancy rates for class A and class B buildings in the market, while rents have increased since 2011. Total net absorption for the second quarter of 2020 was 441,553 sf.

Kansas City Industrial Market

For three consecutive years, the Kansas City industrial market has absorbed over 7.0 million square feet of space. Over the past three years, Kansas City has absorbed 11.2% of the space that existed three years ago. The market has been growing at a rapid pace and the growth has been supported by tenants of all types. The second quarter of 2020 resulted in an increase in vacancy rates of 40 basis points, according to CBRE. Kansas City has 127,399 sf positive net absorption as of the second quarter of 2020.

Minneapolis

Minneapolis, Minnesota has a vibrant and growing workforce as the Greater Minneapolis/St. Paul region’s labor force grew by 6.2% from 2013 to 2018—larger than the 4.3% increase seen nationally during the same period according to the U.S. Bureau of Labor Statistics. Minneapolis is home to a labor pool of approximately 2 million and the highest labor force participation rate for a large metro area at 72% according to the Minnesota Department of Employment and Economic Development. Unemployment was at 3.0% in the fourth quarter of 2019, well below the national average. The city has a well-educated workforce in knowledge occupations, with large employers in the city including General Mills, 3M and Target, causing us to believe that there will be a continued strong demand for office-using employment activities. The Twin Cities (Minneapolis-Saint Paul), rank first in Fortune 500 companies per capita among top 30 metro areas according to Fortune. Additionally, Minneapolis has an established technology market, ranked eleventh in the country according to Cushman & Wakefield, while having an educated workforce ranking in the top 20 for tech talent in the market according to CBRE.

Minneapolis Office Market